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COMPLETE  ACCOUNTING  COURSE—PART  I 


By 

A.  E.  ANDERSEN,  B.B.A. ,  C.P.A. 

Of  Andersen,  DeLany  &  Co.,  Certified  Public  Accountants, 
Chicago,  New  York,  Milwaukee;  Professor  of  Accounting, 
Northwestern  University 


D.  HIMMELBLAU,  B.A. ,  B.B.A. ,  C.P.A. 
Associate  Professor  of  Accounting,  Northwestern  University 


E.  L.  KOHLER,  M.A. ,  C.P.A. 
Instructor  in  Accounting,  Northwestern  University 


New  York 

THE  RONALD  PRESS  COMPANY 

1919 


Copyright.  1917,  The  Ronald  Press  Company 


V 


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COMPLETE  ACCOUNTING  COURSE—PART  I 


CONTENTS 


No.  of 

Lecture  Pages 

1  Single-Entry  Bookkeeping  8 

2  Changing  Books  from  Single  Entry  to  Double  Entry;  Double-Entry 

Bookkeeping  5 

3  The  Account  5 

4  Operation  of  Double  Entry  7 

5  Preparation  of  Financial  Statements  11 

6  Partnerships  9 

7  Expansion  of  Bookkeeping  Records  10 

8  Cash  9^ 

9  Consignments  ;  Promissory  Notes  12 

10  Joint  Ventures  ;  Accruing  Income  and  Expense ;  Deferred  Charges  and 

Credits  11 

11  Consignments-Inward  12 

12  Bills  of  Exchange  ;  Inventories  11 

13  Points  Involved  in  Closing  Books  5 

14  General  Review  6 

15  General  Review  18 

16  Corporations;  Vendor's  Procedure  upon  Sale  of  Single  Proprietor- 

~^      ship  or  Partnership  to  Corporation  7 

17  Capital  Stock  9 

18  Bonds  ;  Voucher  System  13 

19  Records  of  a  Manufacturing  Business  10 

20  Financial  Statements  of  a  Manufacturing  Business  11 

21  Reserves  6 

22  Surplus  9 

23  Dividends  5 

24  Redemption  of  Bonds  13 

25  Stock  and  Bond  Investments  11 

26  Capital  and  Revenue  Expenditures  7 

27  Good-Will,  Patents;  Copyrights;  and  Trade-Marks  10 

28  Consolidations  8 

29  General  Review  15 

30  General  Review  9 


Copyright,  1917,  The  Ronald  Press  Company 

428SM 


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COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  1 
SINGLE-ENTRY  BOOKKEEPING 


WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

Fred  Miller  decides  to  engage  in  the  general  automobile  supply  business. 
He  invests  $5,000  cash  and  leases  store  and  warehouse  facilities  from  Wm, 
Barnes  &  Co.  for  a  term  of  three  years  commencing  January  1,  at  an  annual 
rental  of  $600,  payable  monthly  in  advance.   He  plans  to  keep  the  following 
single-entry  books: 

Day-book  (Form  1) 

Cash  Book  (Form  9) 

Ledger  (Forms  13  and  15) 

The  personal  accoimts  which  follow  will  be  kept  during  January  and  should 
be  opened  in  the  ledger  as  needed.  Entries  should  be  made  for  every  treinsac- 

tion in  the  day-book  if  a  non-cash  transaction,  and  in  the  cash  book  only,  if 

a  cash  transaction.  An  item  affecting  a  personal  account  should  be  posted  as 
soon  as  the  entry  is  made. 

ACCOUNT 
Fred  Miller — Capital  Account 
E.  T.  Adams 
Barnhart  &  Co. 
W.  R.  Bell 
Jno.  Brown  &  Co. 
Burnham  Brown 
E.  F.  Finn 
W.  T.  Jamison 
W.  F.  Martin 
H.  R.  Mather 

A  one-account  page  should  be  used  for  page  1 ;  three-account  pages  for  the 
remainder.   Odd  numbers  refer  to  right-hand  pages,  even  numbers  to  left-hand 
pages. 

SUMMARY  OF  TRANSACTIONS 

JANUARY  2 
The  capital  of  $5,000  is  paid  in.   (Debit  cash  receipts  book;  post  as 
credit  to  Fred  Miller — Capital  account.)  Rent  of  $50  for  the  month  of  January 
is  paid  to  William  Barnes  &  Co.   (Is  a  posting  to  a  personal  account  necessary 
here?)   Warehouse  and  office  fixtures  are  purchased  from  the  Chicago  Furni- 
ture Co.  at  a  cost  of  $750;  invoice  payable  30  days  from  date  less  1%. 

Copyright,  1917,  The  Ronald  Press  Company 


.GE 

ACCOUNT 

PAGE 

1 

Jno.  Smith 

7 

4 

C.  H.  Watt 

7 

4 

Geo.  Wilson 

7 

4 

W.  B.  Winfield 

8 

5 

American  Wind-Shield 

Co. 

9 

5 

Auto  Truck  Co. 

9 

5 

Wilson  Manufacturing 

Co. 

9 

6 

Chicago  Furniture  Co. 

10 

6 

New  York  Auto  Supply 

Co. 

10 

6 

v.::/:  •..:.' '••''If  :/  '■  1-1-2 
'"'''•  •■'•'"'  ••-'                       JANUARY  3 

Miscellaneous  supplies  are  bought  from  the  Wilson  Manufacturing  Co.  at  a 
cost  of  $3,000;  terms,  3%  cash  10  days,  net  30  days.   These  goods  were  pur- 
chased f.  0.  b.  New  York,  and  freight  thereon  amounts  to  |215.50,  which  is 
paid  in  cash. 

JANUARY  4 
A  lot  of  wind-shields  are  purchased  from  the  American  Wind-Shield  Co. ,  net 
cash  30  days,  amount  of  invoice  $1,375.   Sale  to  John  Smith  on  accoimt  $125. 
Cash  sales  $124.50.   Charge  sale  to  W.  F.  Martin  of  miscellaneous  parts 
amounting  to  $97.50;  terms  10  days. 

JANUARY  5 
A  shipment  of  supplies  is  received  today  from  the  New  York  Auto  Supply 
Co.,  covered  by  their  invoice  dated  January  3,  due  in  30  days,  terms  net, 
amounting  to  $3,123.50.  Express  charges  paid  thereon  aggregate  $17.50.  Auto 
delivery  truck  purchased  from  Auto  Truck  Co.  at  a  cost  of  $1,750,  invoice  pay- 
able in  30  days.   Sold  to  George  Wilson  on  account,  miscellaneous  parts 
$118.40. 

JANUARY  6 
Bill  of  Metropolitan  Stationery  Co.  dated  January  2  paid  in  cash,  for  pur- 
chase of  day-book,  ledger,  cash  book,  and  other  miscellaneous  supplies  amount- 
ing to  $44.75.   Fred  Miller  withdraws  cash  on  personal  account,  $50  (charge 
Fred  Miller — Capital  account).   Cash  sales  $110.50. 

JANUARY  8 
Charge  sale  to  W.  T.  Jamison  $215.   Sundry  defective  parts  are  returned  to 
New  York  Auto  Supply  Co.  for  credit,  $70.50.   Pay  salary  of  bookkeeper  and 
cashier  $15. 

JANUARY  9 
Cash  sales  $99.10.   Received  shipment  of  supplies  from  Wilson  Manufac- 
turing Co.  amounting  to  $4,400;  terms,  cash  15  days. 

JANUARY  10 
Ship  to  C.  H.  Watt,  Peoria,  111.,  freight  collect,  supplies  to  the  value 
of  $187.50,  on  account.   John  Smith  pays  the  bill  rendered  against  him  on 
January  4,  $125,  and  deducts  2%  discount  which  is  allowed.   (Enter  the  full 
amount  on  the  cash  receipts  side  and  the  discount  allowed  on  the  cash  dis- 
bursements side.) 

JANUARY  11 
Cash  sales  $110.   Insurance  premiums  paid  $48.   Proprietor  makes  addi- 
tional investment  of  $6,000  in  cash. 

JANUARY  12 
W.  F.  Martin  settles  for  invoice  dated  January  4,  by  giving  a  30-day  note 
for  $97.50  with  interest  at  6%.   Shipment  of  parts  to  E.  F.  Finn,  Urbana, 
111.,  on  account,  $210. 

Copyright,  1917,  The  Ronald  Press  Company 


1 


1-1-3 

JANUARY  13 
Pay  Wilson  Manufacturing  Co.'s  bill  for  $3,000,  deducting  3%  discount  al- 
lowed.  (Enter  the  gross  amount  and  discount  "in  short,"  extending  the  net 
amount,  or  actual  cash  paid.  This  illustrates  a  second  method  of  handling 
discounts  in  single  entry.)   Charge  sale — W,  B.  Winfield,  $195.50.   Sundry 
parts  sold  to  VV.  T.  Jamison  on  the  8th  inst.,  and  billed  at  $37.50,  were  re- 
turned by  him  as  being  defective.  Pay  American  Wind-Shield  Co.  on  account 
$500. 

JANUARY  15 
Charge  sale  of  $425  to  John  Brown  &  Co.  Pay  salary  of  bookkeeper  and 
cashier  $15. 

JANUARY  16 
W.  T.  Jamison  pays  the  bill  dated  January  8,  after  deducting  the  value  of 
the  goods  returned  on  the  13th  inst.   Cash  sales  $275. 

JANUARY  17 
Charge  sale  of  automobile  parts  to  H.  R.  Mather,  $384.50. 

JANUARY  18 
Cash  sales  $178.10.  Paid  for  janitor  service  $12. 

JANUARY  19 
E.  F.  Finn  pays  invoice  dated  January  12,  deducting  cartage  charge  of 
$10.50,  which  is  allowed.   (Make  day-book  entry  for  cartage  allowance.  Dis- 
counts may  be  similarly  handled  and  sometimes  preferably  so.   Two  postings — 
one  from  the  cash  book,  the  other  from  the  day-book~will  be  made  to  the  per- 
sonal account.)   Charge  sale  E.  T.  Adams  $187.50. 

JANUARY  20 
Gas  and  electric  light  bills  $18.50  paid.   Fred  Miller  withdraws  for  per- 
sonal use  in  merchandise  $150.   (Debit  the  capital  account.)   Cash  sales  $360. 

JANUARY  22 
Cash  sales  $1,801.50. 

JANUARY  23 
Shipments  to  Burnham  Brown  on  account  $1,315.  Cash  sales  $1,405. 

JANUARY  24 
Pay  American  Wind-Shield  Co.  $500  on  account ;  also  Wilson  Manufacturing 
Co.'s  invoice  dated  January  9,    $4,400. 

JANUARY  26 
Printing  bill  $23.75  paid  today.  Cash  sales  $1,187.60. 

JANUARY  27 
Fred  Miller  withdraws  for  personal  use,  in  cash,  $50.   Cash  sales 
$1,218.10. 

JANUARY  29 
Burnham  Brown  pays  $200  on  account  of  invoice  rendered  January  23.  Pay  New 
York  Auto  Supply  Co.  $1,000  on  account. 

Copyright,  1917,  The  Ronald  Press  Company 


1-1-4 
JANUARY  30 
C.  H.  Watt  pays  his  invoice  of  January  10  and  at  the  same  time  orders  ad- 
ditional goods  amounting  to  $110.  The  order  is  shipped. 

1.  Post  the  transactions  for  the  month  of  January  from  the  day-book  and 
cash  book  to  the  ledger  accounts  where  necessary.  After  the  posting  is  com- 
pleted, prepare  a  statement  of  assets  and  liabilities  at  January  31  from  the 
information  contained  in  the  books,  and  the  following: 

Inventory  of  merchandise  on  hand  $2,19  7.50;  warehouse  and  office  fixtures 
$750;  auto  delivery  truck  $1,750;  note  receivable  $97.50. 

2.  What  is  the  amount  of  profit  or  loss  for  the  month  of  January?  Prepare 
a  statement  showing  how  same  is  determined. 

Having  ascertained  the  net  profit  for  January,  make  an  entry  in  the  day- 
book recording  the  profits  earned,  and  post  the  same  to  Fred  Miller's  capital 
account.   The  balance  of  the  capital  account  should  now  be  the  same  as  the  net 
worth  appearing  in  the  statement  of  assets  and  liabilities. 


Copyright,  1917,  The  Ronald  Press  Company 


1-1-5 

SINGLE-ENTRY  BOOKKEEPING 

Definition — Bookkeeping  in  general  may  be  defined  as  the  recording  of  fi- 
nancial transactions  in  books  of  account.   Single  entry  is  a  term  used  to  de- 
scribe those  methods  of  recording  business  transactions  which  do  not  involve 
complete  double  entry,  and  is  defined  by  various  authorities  as  follows: 

•As  the  term  'single  entry'  is  employed  in  text-books  and  referred  to  in 
examination  questions,  it  usually  me£ins  the  ledger  accounts  of  customers  and 
trade  creditors,  together  with  the  source  book  or  books  from  which  items  com- 
prising these  accounts  are  posted."   (Belding) 

"The  fundamental  distinction  is  that  theoretically  single  entry  has  none 
but  personal  accounts."   (Cole) 

"Books  kept  upon  a  partial  or  incomplete  system  of  bookkeeping  are  said  to 
be  kept  by  single  entry."   (Lisle) 

"Single-entry  bookkeeping  is  in  its  essence  the  recording  of  personal 
debts  only. "   (McFarland  &  Rossheim) 

Books  Kept — The  books  usually  kept  in  a  single-entry  system  are  (1)  day- 
book, (2)  cash  book,  and  (3)  ledger.   A  sales  book,  purchase  record,  note  rec- 
ord, and  other  books  may  also  be  used  for  memorandum  purposes. 

1.  Day-book.   Form  1  illustrates  the  common  type  of  day-book.   Columns 
are  ruled  for  date,  account,  explanation,  folio,  details,  and  total.   Its  form 
is  not  restricted.   The  two  money  columns  may  be  used  for  "debit"  find  "credit" 
items  respectively,  while  the  date  may  be  placed  on  a  line  immediately  above 
the  description  of  the  transaction. 

The  day-book  has  nearly  disappeared  from  modern  bookkeeping  practice.   It 
was  formerly  the  custom  to  attach  the  utmost  importance  to  this  record,  even 
in  double-entry  bookkeeping.  All  entries  affecting  the  accounts  of  a  business 
had  to  be  entered  here  in  great  detail ;  it  was  recognized  by  the  courts  as 
evidence  against  debtors  and  more  trustworthy  than  a  ledger.   It  is  used  no 
longer  except  in  single-entry  bookkeeping. 

While  in  single  entry  every  transaction  of  a  business  is  customarily  re- 
corded in  the  day-book,  only  those  items  affecting  personal  accounts  are 
posted  to  the  ledger. 

2.  Cash  Book.   A  cash  book,  if  kept  in  single  entry,  differs  in  no  way 
from  the  ordinary  cash  book.   The  left-hand  page  is  the  "debit"  side  (cash  re- 
ceipts) and  the  right-hand  page  the  "credit  side"  (cash  payments).  As  a  gen- 
eral rule  the  cash  book  is  used  as  a  posting  medium,  but  in  some  cases  all 
cash  entries  are  made  in  the  day-book  and  posted  thence  into  the  ledger  if 
they  affect  personal  accounts.   Often  the  cash  book  is  dispensed  with  alto- 
gether, a  cash  register  and  informal  memoranda  taking  its  place.  When  the 
customer  pays  an  account,  the  amount  paid  is  recorded  and  footed  in  the  cash 
register  on  a  separate  set  of  wheels  by  depressing  a  key  labeled  "On  Ace." 

The  daily  total  thereof  should  agree  with  the  amounts  which  appear  on  the 
stubs  of  the  receipt  book.   Accounts  to  be  credited  are  then  recorded  in  the 
day-book  from  the  receipt  book  and  postings  made.   Amounts  paid  to  creditors 
may  be  similarly  abstracted  from  the  stubs  of  the  check  book  and  then  entered 
in  the  day-book  and  posted  to  the  ledger.   If  there  is  no  cash  register,  or  if 
payments  to  creditors  are  sometimes  made  in  cash  instead  of  by  check,  it  is 
best  to  keep  a  cash  book,  the  balance  of  which  will  at  any  time  show  the 

Copyright,  1917,  The  Ronald  Press  Company 


1-1-6 
amount  of  cash  on  hand  and  in  the  bank.  Transactions  with  the  bank  may  appear 
in  the  cash  book  by  adding  additional  columns  thereto;  but  in  a  small  business 
the  information  appearing  on  the  check  stubs  is  usually  sufficient. 

3.   Ledger.   As  already  indicated,  the  ledger  contains  accounts  with  per- 
sons only — debtors  and  creditors,  and  often  only  debtors.   Many  varieties  of 
single-entry  ledgers  may  be  found.  A  simple  rule  for  debiting  and  crediting 
such  accounts  is  "debit  for  value  given  by  the  business  and  credit  for  value 
received  by  the  business." 

In  addition  to  personal  accounts  with  debtors  and  creditors,  the  proprie- 
tor may  keep  an  account  with  himself,  showing  original  investment,  additions, 
and  withdrawals. 

METHOD  OF  OPENING  A  SINGLE-ENTRY  SET  OF  BOOKS 

Assume  that  John  Brown  commences  business  on  January  1,  1916,  with  the 
following  assets  on  hand:  store  and  lot  $2,000;  merchandise  $850;  cash  $150; 
$500  due  from  William  Smith.  Also  John  Brown  owes  James  Green  for  merchandise 
purchased  to  the  extent  of  $200.   The  following  entry  would  be  made  in  the 
day-book: 

LEDGER 
DATE     FOLIO  ACCOUNT 

1916 
Jan.  1     X     John  Brown — Investment 

For  capital  this  day  invested, 
details  as  follows: 
Store  and  Lot 
Merchandise 
Cash 
William  Smith — Account  Receivable 

Total  Assets 
Deduct : 

James  Green — Account  Payable 

X     William  Smith 

For  account  due  me,  as  above 
X     James  Green 

For  amount  due  him,  as  above 

The  "Dr."  or  "Cr."  notifies  the  bookkeeper  that  the  item  so  designated  is 
to  be  posted  as  a  "debit"  or  "credit"  to  the  account  specified. 

METHOD  OF  CLOSING  BOOKS  AND  PREPARATION  OF  FINANCIAL  STATEMENTS 
AT  THE  CLOSE  OF  A  FISCAL  PERIOD 

Continuing  the  illustration  in  the  preceding  paragraph,  assume  that  on  De- 
cember 31,  1916,  John  Brown  took  an  inventory  of  his  merchandise  on  hand  and 
found  it  to  be  $750,  valued  at  cost.   The  total  cash  in  his  cash  register 
amounted  to  $50,  while  the  last  stub  in  his  check  book  showed  his  bank  balance 
to  be  $200.  His  accounts  receivable  according  to  his  ledger  totalled  $1,000, 

Copyright,  1917,  The  Ronald  Press  Company 


DETAIL 

TOTAL 

COLUMN 

COLUMN 

Cr. 

$3,300.00 

$2,000.00 

850.00 

150.00 

able   500.00 

$3,500.00 

200.00 

Dr. 

500.00 

Cr. 

200.00 

1-1-7 
while  he  owed  on  accounts  payable  $600.   During  the  year  he  added  |1,000  to 
his  investment  in  the  business  and  withdrew  in  cash  $1,200.   It  is  desired  to 
ascertain  his  financial  position  at  December  31,  1916,  and  his  net  profits  for 
the  year.   His  assets  and  liabilities  at  December  31,  1916,  would  therefore 
appear  as  follows: 

JOHN  BROWN 

STATEMENT  OF  ASSETS  AND  LIABILITIES 

DECEMBER  31,  1916 


ASSETS 
Store  and  Lot 
Merchandise  Inventory 
Accounts  Receivable 
Cash  in  Bank  and  on  Hand 


Total  Assets 


$2,000.00 

750.00 

1,000.00 

250.00 


$4,000.00 


LIABILITIES  AND  CAPITAL 
Accounts  Payable         $  600.00 
Balance — Net  Worth,  De- 
cember 31,  1916         3,400.00 


Total  Liabilities  and 

Capital  $4,000.00 


The  net  profits  would  be  ascertained  by  comparing  the  net  worth  at  the  be- 
ginning and  end  of  the  period  and  taking  into  account  additions  of  capital  and 
withdrawals,  thus: 

JOHN  BROWN 

STATEMENT  OF  NET  PROFITS 

YEAR  ENDING  DECEMBER  31,  1916 


Net  Worth  December  31,  1916 
DEDUCT— Net  Worth  January  1,  1916 

Net  Increase  in  Investment 
ADD — Withdrawals  during  year 


DEDUCT — Additional  Capital  Invested 
Net  Profits  for  vear 


$3,400.00 
3,300.00 

$  100.00 
1,200.00 

$1,300.00 
1,000.00 

$  300.00 


This  method  of  arriving  at  net  profits  is  called  the  "asset  and  liability" 
method,  in  contrast  to  the  "profit  and  loss"  method  which  will  be  illustrated 
later.   The  formula  for  obtaining  profits  in  this  manner  may  be  stated  alge- 
braically as  follows: 


(Assets  at 
(Net  Prof-)  (end  of  period 
(it  for  a  )-(    less 
(given    )  (Liabilities 
(period    )  (at  end  of 

(period 


(Assets  at  begin-) 


(ning  of  period 
LESS(      less 

(Liabilities  at 
(beginning  of 
(period 


)  (With-  )  (Additional) 
) PLUS ( drawals ) LESS ( investment ) 
)  (during  )  (during  ) 
)  (period  )  (period  ) 
) 


Copyright,  1917,  The  Ronald  Press  Company 


1-1-8 
Stated  in  another  way  the  NET  WORTH  is: 

Increased  by  And  decreased  by 

(a)  Profit  arising  .    (a)  Losses  sustained  from 

from  operations  operations 

(b)  Contribution  of  additional         (b)  Withdrawal  of 

capital  by  owners  capital  by  owners 

ADVANTAGES  AND  DISADVANTAGES  OF  SINGLE  ENTRY 

The  limitations  of  single  entry  may  be  pointed  out  more  easily  than  its 
merits.   In  estate  accounting,  or  in  small  retail  businesses  where  the  chief 
bookkeeping  need  is  to  show  receipts  and  disbursements  and  the  status  of  per- 
sonal accounts  rather  than  the  condition  of  all  the  assets  and  the  causes  of 
changes  therein,  incomplete  double  entry  may  be  sufficient.   But  under  present 
business  conditions  even  the  small  merchant  feels  the  need  of  knowing  his 
financial  position  at  frequent  intervals,  and  what  may  be  more  important,  the 
sources  of  his  profit.  The  data  required  for  successful  operation  under 
increased  competition  and  standardization  can  be  obtained  only  from  accurate 
and  analytical  records,  £ind  single-entry  records  of  the  kind  in  general  use  do 
not  meet  these  requirements. 

Three  leading  objections  to  single  entry  may  be  stated  as  follows: 

1.  A  record  of  accounts  with  persons  only  is  insufficient.   An 

analysis  of  various  elements  in  a  business  can  be  secured  with 
greater  facility  by  a  system  of  detailed  accounts  which  increase 
in  number  and  importance  with  the  size  of  the  business. 

2.  While  the  net  profit  or  loss  for  the  period  may  be  obtained  by 

single  entry  (or  by  keeping  no  records  at  all),  no  analysis 
thereof  is  possible  ordinarily  without  the  introduction  of  a 
columnar  cash  book  and  other  records  which  would  be  at  least  as 
difficult  to  operate  as  a  set  of  simple  double-entry  records. 

3.  No  check  on  the  clerical  accuracy  of  the  posting  can  be  made  under 

the  methods  generally  in  use.   A  sale  to  a  customer  entered  in 
the  day-book  might  never  be  posted  to  a  customer's  account.   But 
in  double  entry  such  an  omission  is  unlikely  because  of  the 
check  on  clerical  accuracy  obtained  through  the  trial  balance. 

REFERENCES : 

Belding,  pages  149-152 

Klein,  Chapter  IV 

Lisle,  pages  42-44 

MacFarland  and  Rossheim,  pages  14-18 


Copyright,  1917,  The  Ronald  Press  Company 


1-2-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  2 

CHANGING  BOOKS  FROM  SINGLE  ENTRY  TO  DOUBLE  ENTRY 
DOUBLE-ENTRY  BOOKKEEPING 


Problem  1 

The  assets  and  liabilities  of  the  firm  of  Higgins  &  Wilcox  at  June  30, 
1916,  were  as  follows:  land  |5,000;  buildings  $12,000;  machinery  $18,000; 
other  equipment  $4,000;  inventory  of  merchandise  $29,000;  uncollected  cus- 
tomers' accounts  $18,000;  unpaid  invoices  for  purchases  of  materials  $7,500; 
notes  receivable  $3,500;  bank  logins  $5,000;  capital  account — Higgins  $37,000; 
and  capital  account — Wilcox  $40,000. 

The  foregoing  information  was  abstracted  from  the  single-entry  books  kept 
and  other  records. 

On  June  30,  1917,  the  firm's  boolckeeper  compiled  the  following  data  from 
the  books  and  from  information  furnished  by  certain  memorandum  records  kept  by 
Walter  Higgins — one  of  the  partners.   Warehouse  and  office  furniture  and 
fixtures  $1,500;  land  $6,500;  machinery  $19,500;  buildings  $12,000;  other 
e.quipment  $6,000;  inventory  of  merchandise  $35,000;  uncollected  customers'  ac- 
counts $17,000;  accounts  payable  $18,500;  notes  receivable  $5,500;  bank  loans 
$4,000;  withdrawals  by  Higgins  $2,000;  and  by  Wilcox  $3,000. 

The  partners  desired  the  bookkeeper  to  furnish  the  following: 

(a)  Statement  of  assets  and  liabilities  at  June  30,  1917. 

(b)  Statement  of  profit  or  loss  for  the  year  ending  June  30,  1917. 

(c)  Statement  of  partners'  capital  accounts  at  June  30,  1917. 

The  partnership  agreement  provides  that  profits  and  losses  are  to  be 
divided  on  the  basis  of  1/3  to  Higgins  and  2/3  to  Wilcox. 

Also  prepare  journal  entries  necessary  to  open  the  books  on  a  double-entry 
basis. 

MISCELLANEOUS  QUESTIONS 

Question  1 — Suggest  a  method  of  proving  the  correctness  of  postings  in 
single-entry  books. 

Question  2 — Following  out  the  illustration  given  in  1-1-6,  suppose  John 
^Brown  has  kept  an  account  with  himself,  as  proprietor.   Prepare  the  account  as 
it  would  appear  on  December  31,  showing  original  investment,  withdrawals,  and 
profits  for  the  year. 

Question  3 — Write  a  simple  explanation  of  the  terms  "debit"  and  "credit" 
so  that  they  are -intelligible  to  a  person  not  familiar  with  the  handling  of 
accounts. 

Copyright,  1917,  The  Ronald  Press  Company 


1-2-2 
Question  4 — Explain  the  following  terms: 

(a)  Assets 

(b)  Liabilities 

(c)  Net  Worth 

(d)  Entry 

(e)  Bookkeeping 

(f)  Accounting 


WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

From  the  statement  of  assets  and  liabilities  prepared  from  the  books  and 
other  records  of  Fred  Miller,  draft  the  journal  entries  required  to  be  made  in 
order  to  open  his  books  on  the  double-entry  system.  Where  the  accounts  already 
appear  in  the  ledger,  note  after  such  items  in  the  journal  entry  "already 
posted,"  posting  the  balance  of  the  items  to  the  ledger. 

The  books  of  account  to  be  kept  by  Fred  Miller  during  February  are: 

Journal  (Form  2) 
Cash  Book  (Form  9) 

Ledger  (Forms  13,  14,  and  15) ;  the  ledger  pages  opened  in  the  January 
transactions  to  be  retained, and  new  accounts  opened  as  shown  below. 

ACCOUNT 
Fred  Miller — Drawing  Account 
Warehouse  and  Office  Fixtures 
Auto  Delivery  Truck 
Merchandise  Inventory 
Notes  Receivable 
Cash 
Merchandise 


Pages  2  and  11-12  are  one-account  pages  ;  page  15  is  a  two-account  page ; 
the  others  are  three-account  pages. 

The  merchandise  inventory  will  appear  in  the  Merchandise  Inventory  ac- 
count ;  purchases,  sales,  returns,  and  allowances  in  the  Merchandise  account; 
discounts  received  and  given  in  the  Discount  accounts. 

Every  transaction  must  be  "journalized,"  i.  e.,  a  debit  for  every  credit 
must  appear  either  in  the  cash  book  or  general  journal.  Postings  to  the  ledger 
should  be  made  as  soon  as  the  entry  is  completed.   The  debits  and  credits  to 
the  cash  account  will  be  made  only  at  the  end  of  the  month,  in  total,  and 
entries  in  the  cash  book  should  be  so  made  that  it  will  be  possible  to  show 
the  total  receipts  and  total  disbursements  on  February  28.   It  will  be  noticed 
that  the  sheets  for  cash  receipts  and  cash  disbursements  each  contain  two  col- 
umns.  The  first  column  on  either  page  should  be  used  for  current  receipts  and 
disbursements  respectively;  while  in  the  last  column  should  be  entered  bal- 
ances brought  forward  and  totals  for  the  month. 

Copyright,  1917,  The  Ronald  Press  Company 


PAGE 

ACCOUNT 

PAGE 

2 

Salaries 

13 

3 

Rent 

13 

3 

Stationery  and  Supplies 

13 

3 

General  Expense 

14 

8 

Interests 

14 

8 

Discount  on  Sales 

14 

11-12 

Discount  on  Purchases 

15 

Profit  and  Loss 

15 

1-2-3 


Solution  to  Assignment  I-l-l 

FINANCIAL  STATEMENTS  OF  FRED  MILLER  AT  JANUARY  31 

FRED  MILLER 

STATEMENT  OF  ASSETS  AND  LIABILITIES 

JANUARY  31,  19— 


ASSETS 
Warehouse  and  Office  Fix- 
tures 
Auto  Delivery  Truck 
Inventory  of  Merchandise 
Accounts  Receivable 
Note  Receivable 
Cash 

Total  Assets 


LIABILITIES  AND  CAPITAL 
Accounts  Payable  ^  4,928.00 

Balance — Net  Worth,  January 
31,  19—  11,289.30 


\  750.00 
1,750.00 
2,197.50 
2,535.90 
97.50 
8,886.40 


$16,217.30   Total  Liab.  &  Capital 


$16,217.30 


FRED  MILLER 

STATEMENT  OF  PROFIT 

MONTH  ENDING  JANUARY  31,  19— 

Net  Worth  January  31,  per  statement 
Deduct — Investments  during  January: 

January  1        $5,000.00 
January  11        6,000.00 


Increase  in  Net  Worth 

Add — Withdrawals  during  month 

Net  Profit  for  month 


$11,289.30 

11,000.00 

$   289.30 
250.00 

$   539.30 


SCHEDULE  OF  ACCOUNTS  RECEIVABLE 
At  January  31,  19 — 


£.  T.  Adams 
Jno.  Brovn  &  Co. 
Bumham  Brown 
H.  R.  Mather 
C.  H.  Watt 
Geo.  Wilson 
W.  B.  Winfield 

Total 


1,115.00 
384.50 
110.00 
118.40 
195.50 

$2,535.90 


SCHEDULE  OF  ACCOUNTS  PAYABLE 
At  January  31,  19 — 


%     187.50   American  Wind-Shield  Co. 
425.00   Auto  Truck  Co. 


Chicago  Furniture  Co. 
New  York  Auto  Supply  Co, 


Total 


\     375.00 

1,750.00 

750.00 

2,053.00 


$4,928.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-2-4 
METHOD  OF  CHANGING  A  SET  OF  BOOKS  FROM  A  SINGLE-ENTRY  TO  A  DOUBLE-ENTRY  BASIS 

In  single-entry  accounts  with  persons  only  are  usually  kept.   In  order  to 
change  to  double  entry  it  will  be  necessary,  therefore,  to  set  up  those  assets 
and  liability  accounts  not  already  appearing  on  the  ledger.   To  accomplish 
this  a  journal  entry  should  be  made  containing  all  the  items  in  the  statement 
of  assets  and  liabilities.   If  a  new  ledger  is  opened  all  items  will  be 
posted.   If  the  old  ledger  is  retained  a  comment  should  be  made  following  the 
accounts  receivable  and  payable,  that  they  are  already  posted.   Referring  to 
the  illustration  in  1-1-6,  the  following  entry  will  show  how  John  Brown's 
books  may  be  put  upon  a  double-entry  basis.   The  day-book  is  transformed  into 
a  journal  by  using  the  "details"  column  as  a  "debit"  column  and  the  "total" 
column  as  a  "credit"  column: 


LEDGER 
FOLIO 

X 
X 
X 


ACCOUNT 
Store  and  lot 
Merchandise  Inventory 
Cash  (to  be  entered  also  in  cash  book) 
William  Smith  (already  posted) 

To — James  Green  (already  posted) 
John  Brown — Capital  Account 


DEBIT 

$2,000.00 

750.00 

250.00 

1,000.00 


CREDIT 


\      600.00 
3,400.00 


If  the  proprietor's  capital  account  has  been  kept  in  the  single-entry 
ledger,  it  should  be  treated  in  the  same  manner  as  accounts  receivable  and 
payable. 

DOUBLE-ENTRY  BOOKKEEPING 

DEFINITION — Double-entry  bookkeeping  was  first  made  known  in  a  mathemati- 
cal treatise  published  in  1494  by  Luca  Paciolo.   A  definition  satisfactory  to 
all  has  not  been  formulated  as  yet,  but  the  following  quotations  are  of 
interest: 

■Scientific  bookkeeping,  known  as  the  double-entry  method,  is  the  art  of 
classifying  and  recording  business  transactions  in  chronological  sequence,  and 
in  such  manner  as  to  show  the  effects  which  all  business  transactions  and 
necessary  bookkeeping  adjustments  have  upon  the  assets,  liabilities,  capital, 
surplus,  revenue,  and  expenses  of  the  business."   (Bentley) 

"Bookkeeping  is  the  art  of  recording  business  transactions  with  the  view 
of  having  a  permanent  record  of  them  and  of  showing  their  effect  upon  wealth. 
Each  individual  business  transaction  has  a  two-fold  effect,  and  it  may  be  use- 
ful to  look  on  this  effect  as  having  a  positive  and  also  a  negative  character. 
As  bookkeeping  records  this  two-fold  effect,  it  is  spoken  of  as  book- 
keeping by  double  entry."   (Lisle) 

"The  record  of  a  business  transaction  by  which  we  indicate  both  the  giver 
and  the  receiver  of  value  is  called  'double  entry.'  "   (Belding) 

Double-entry  bookkeeping  "is  based  on  the  fact  that  every  transaction  in- 
volves a  transfer  of  property  or  its  equivalent  from  one  person  to  another, 
the  terms  'property'  and  'person'  being  used  in  the  widest  possible  sense." 
(Dickinson) 


Copyright,  1917,  The  Ronald  Press  Company 


1-2-5 

WHEN  TO  DEBIT  AND  WHEN  TO  CREDIT — The  following  rule  is  given  for  "jour- 
nalizing" (entry- making) : 

DEBIT  FOR  CREDIT  FOR 

1.  An  increase  of  assets  1.  A  decrease  of  assets 

2.  A  decrease  of  liabilities  2.  An  increase  of  liabilities 

3.  A  decrease  of  proprietorship  3.  An  increase  of  proprietorship 
(wages,  rent,  and  other  expenses)  (i.  e,,  sales  and  other  income) 

With  the  above  rule  in  mind,  the  student  should  review  the  transactions  in 
Lecture  1,  explaining  the  debit  and  credit  involved  in  each  case. 

BOOKS  KEPT — All  books  used  in  double  entry  may  be  classified  either  as 
journals  or  ledgers.   The  journals  are  called  BOOKS  OF  ORIGINAL  ENTRY  and 
their  function  is  to  record  transactions  chronologically  and  in  sufficient  de- 
tail so  that  the  subject  matter  may  be  clearly  identified  at  any  time.  Ledgers 
are  called  BOOKS  OF  FINAL  ENTRY  and  classify  transactions  according  to  a  pre- 
determined schedule  of  accounts.   The  operation  of  transferring  items  from  a 
journal  to  a  ledger  is  termed  POSTING.   AjLl  entries  in  a  journal  must  be 
posted,  either  separately  or  in  total,  and,  conversely,  no  item  may  appear  in 
a  ledger  that  has  not  been  posted  from  a  journal. 

The  term  "journal"  generally  refers  to  the  "general  journal,"  i.  e.,  the 
book  of  original  entry  which  receives  entries  which  cannot  be  put  elsewhere. 
The  ordinary  cash  book  is  sometimes  called  a  "cash  journal,"  but  the  latter 
term  may  also  refer  to  a  combined  cash  book  and  general  journal. 

REFERENCES : 

Cole,  Chapter  II 
Gilman,  Chapter  I 
Klein,  Chapter  I 
Sprague,  Chapters  IV-V 


Copyright,  1917,  The  Ronald  Press  Company 


1-3-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  3 

THE  ACCOUNT 


MISCELLANEOUS  QUESTIONS 

Question  5 — What  is  your  understanding  of  the  terms  Capital  Assets,  Cur- 
rent Assets,  Capital  Liabilities,  Current  Liabilities? 

Question  6 — Indicate  which  of  the  accounts  of  Fred  Miller  would  fall  under 
the  classification  of  Real,  Nominal,  Personal,  Impersonal,  Asset,  Liability, 
Income,  and  Expense  accounts. 

Question  7 — An  account  current  with  the  C  D  Co.  is  kept  on  the  A  B  Co.'s 
books.   Transactions  during  the  month  of  September  are  as  follows:   (1)  credit 
balance  September  1,  $1,856;  (2)  purchase  September  3  from  the  C  D  Co.  $3,450; 
(3)  returned  purchases  September  5  on  shipment  of  September  3  amounting  to 
$306;  (4)  sale  to  C  D  Co.  September  16,  $1,670;  (5)  allowance  September  20  to 
C  D  Co.  on  account  of  sale  made  September  16,  $320;  (6)  check  sent  to  C  D  Co. 
September  25,  $2,000.   Prepare  the  account  as  it  would  appear  on  the  A  B  Co.'s 
books,  bringing  down  the  balance  on  October  1.   Where  should  this  account  ap- 
pear on  a  statement  of  assets  and  liabilities? 


WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

SUMMARY  OF  TRANSACTIONS 

FEBRUARY  1 
Rent  of  $50  for  February  paid.   Purchased  from  the  American  Wind-Shield 
Co.,  much  below  the  current  market  prices,  a  lot  of  miscellaneous  goods  of  an 
aggregate  value  of  $8,000,  payable  in  5  days  less  2%  discount.   Geo.  Wilson 
purchases  miscellaneous  auto  supplies,  terms  net  30  days — $230.   Cash  sales 
$180.50. 

FEBRUARY  2 
John  Brown  ft  Co.  pay  invoice  of  January  5,  $425.   Paid  for  auto  truck, 
$1,750,  to  the  Auto  Truck  Company.  Miscellaneous  goods  sold  to  E.  T.  Adams, 
terms  net  30  days,  $75.   Cash  sales  $184. 

FEBRUARY  3 
Pay  Chicago  Furniture  Co.  $750  less  1%.   Burnham  Brown  pays  the  balance  of 
$1,115  due  on  his  account,  and  an  additional  shipment  of  goods  valued  at  $310 
is  made  to  him. 

Copyright,  1917,  The  Ronald  Press  Company 


1-3-2 

FEBRUARY  5 
Deduction  of  $75  allowed  by  the  American  Wind-Shield  Co.  for  defective 
goods  returned.   The  balance  of  the  invoice  of  January  4,  amounting  to  $300, 
remitted  in  cash.   Paid  to  the  New  York  Auto  Supply  Co.  $2,053  in  full  settle- 
ment of  account.   Cash  sales  $215.60.   Salary  of  cashier  and  bookkeeper  paid, 
$15. 

FEBRUARY  6 
H.  R.  Mather  remits  $380,  having  been  allowed  $4.50  for  freight  which  he 
paid.   Cash  sales  $298.   Purchases  from  the  New  York  Auto  Supply  Co.,  terms  2% 
10  days,  miscellaneous  goods,  $1,113.60.   Pay  bill  of  the  American  Wind-Shield 
Co.,  $8,000  less  discount. 

FEBRUARY  7 
The  following  account  is  collected:  W.  B.  Winfield  $195.50.   Charge  sale 
to  C.  H.  Watt  $325. 

FEBRUARY  8 
Sundry  office  expenses,  carfare,  etc.,  paid  in  cash,  $11.30. 

FEBRUARY  9 
Purchase  tires  and  other  supplies  from  New  York  Auto  Supply  Co.,  $1,350, 
terms  net  cash  in  30  days. 

FEBRUARY  10 
Cash  sales  $194.50.   Sundry  warehouse  charges  $11.80,  paid  in  cash  (charge 
General  Expense). 

FEBRUARY  12 
W.  F.  Martin  pays  his  note  of  January  12,  with  interest  30  days  at  6%. 
George  Wilson  pays  invoice  of  $118.40,  deducting  $20  for  defective  materials 
returned.   Bookkeeper's  salary  $15  paid. 

FEBRUARY  13 
Sale  to  W.  B.  Winfield,  terms  30  days  net,  $398.   Office  supplies  pur- 
chased for  cash  $18.40  (charge  Stationery  and  Supplies). 

FEBRUARY  14 
Charge  sale  to  W.  R.  Bell  $1,810,  terms  2%  cash  in  ten  days. 

FEBRUARY  15 
Electric  light  and  gas  bills  paid  in  cash  $19.50. 


Copyright,  1917,  The  Ronald  Press  Compeny 


1-3-3 


THE  ACCOUNT 


DEFINITION — An  account  is  "an  entry  or  group  of  entries,  either  debits  or 
credits  or  a  combination  of  both,  under  a  specific  or  descriptive  heading,  ex- 
hibiting the  history  and  results  of  the  transactions  pertaining  thereto." 
(From  report  of  Committee  on  Terminology,  American  Association  of  Certified 
Public  Accoimtants. )   The  account  may  be  known  by  its  "specific  or  descriptive 
heading,"  that  is,  by  a  title  such  as  "merchandise,"  "salaries,"  or  by  a  num- 
ber or  symbol.   Accounts  are  known  by  their  numbers  in  many  large  businesses 
for  the  purpose  of  convenient  reference.   (See  classification  of  accounts  for 
various  public  utilities  prescribed  by  the  Interstate  Commerce  Commission. ) 
Mnemonic  symbols,  that  is,  symbols  that  suggest  the  name  of  the  account  (AP, 
■Administrative  Postage")  are  sometimes  used.   (See  Cole,  "Cost  Accounting  for 
Institutions. " ) 

CLASSIFICATIONS  OF  ACCOUNTS — For  the  purpose  of  securing  uniform  results 
and  control  over  the  accounts  of  public  utilities,  the  Interstate  Commerce 
Commission  and  many  state  public  utility  commissions  have  prescribed  classifi- 
cations of  accounts,  usually  in  great  detail.   The  Bureau  of  Business  Research 
at  Harvard  has  suggested  classifications  for  retail  shoe  dealers  and  retail 
grocers  together  with  a  system  of  reports  which  have  worked  out  successfully. 
Whether  or  not  a  uniform  system  of  accounts  is  to  be  followed,  a  definite 
classification  should  be  determined  upon  before  the  books  of  a  concern  are 
opened,  due  provision  being  made  for  the  possible  future  expansion  of  the 
business.   The  following  is  a  simple  classification  of  accounts  of  a  small  re- 
tail business  together  with  a  system  of  numbering  that  may  be  followed: 


ASSETS 

101  Land 

102  Buildings 

103  Fixtures 

201  Inventory  of  Merchandise 

202  Accounts  Receivable 

203  Notes  Receivable 

204  Cash 

LIABILITIES 

401  Proprietor's  Capital  Account 

402  Proprietor's  Drawing  Account 
501  Mortgage  Payable 

601  Accounts  Payable 

602  Notes  Payable 

INCOME 

801  Sales 

802  Interest  Received 


EXPENSE 


901 

Salaries 

902 

Rent 

903 

Heat  and  Light 

904 

Advertising 

905 

Stationery  and  Printing 

906 

Miscellaneous  Expense 

907 

Interest  Paid 

KEY  TO  CLASSIFICATION 

100 

Capital  Assets 

200 

Current  Assets 

300 

400 

Proprietor's  Accounts 

500 

Long-term  Liabilities 

600 

Current  Liabilities 

700 

800 

Income 

900 

Expense 

The  classification  being  determined  upon,  the  order  in  which  the  accounts 
appear  in  the  ledger  is  immaterial.   In  a  small  business  where  the  accounts 
are  few,  an  alphabetical  arrangement  might  be  found  convenient  ;  in  a  larger 
business  the  order  as  illustrated  on  this  page  might  be  followed,  especially 
if  the  accounts  bear  numbers. 


Copyright,  1917,  The  Ronald  Press  Comoany 


1-3^4 
DIVISION  OF  ACCOUNTS — Accounts  are  generally  divided  into  the  following 
classes: 


(Asset 

( 

1 Personal 

(Real 

( 

1   and 

( 

( 

1  Impersonal 

( 

(Liability 

Accounts ( 

( 

(Expense 

( 

( 

(Nominal ( 

1  Impersonal 

( 

1   only 

(Income 

REAL  accounts  are  those  that  express  the  financial  condition  of  the  busi- 
ness and  consist  of  asset  and  liability  accounts.   They  are  also  called  FINAN- 
CIAL accounts. 

NOMINAL  accounts  are  those  that  show  the  results  from  operation  of  a  busi- 
ness, i.  e.,  the  income  and  expense  accounts,  and  are  sometimes  referred  to  as 
ECONOMIC  accounts. 

MIXED  accounts  are  those  which  contain  both  real  and  nominal  elementSo 
The  commonest  example  of  a  mixed  account  is  the  old-style  merchandise  account. 

An  ACCOUNT  CURRENT  or  CURRENT  ACCOUNT  is  an  account  which  contains  "a  run- 
ning record  of  current  financial  transactions  between  two  parties  who  may, 
through  the  growth  of  their  account,  become  debtor  and  creditor  alternately." 
That  is,  the  account  current  may  be  either  an  asset  or  liability,  according  to 
whether  the  balance  is  a  debit  or  credit. 

MERCHANDISE  ACCOUNT — In  a  trading  business  the  merchandise  account  shows 
the  profit  or  loss  from  the  purchase  and  sale  of  merchandise.   When  kept  as  a 
single  account  it  generally  contains  the  following  items: 

IffiRCHANDISE  ACCOUNT 
DEBIT  CREDIT 

With  inventory  at  beginning  of        With  sales  of  merchandise  during 

period.  period. 

With  purchases  of  merchandise  during   With  return  purchases. 

period.  With  allowances  received  on  pur- 

With  freight,  cartage  and  other         chases. 

charges  on  purchases  and  sales.     With  inventory  at  close  of  period. 
With  return  sales. 
With  allowances  on  sales. 

The  balance  of  this  account,  if  a  credit  balance,  shows  the  profit  on  mer- 
chandise sales  before  the  expenses  of  the  business  are  deducted,  and  is  known 
as  the  GROSS  PROFIT;  if  a  debit  balance  it  represents  the  GROSS  LOSS. 

Copyright,  1917,  The  Ronald  Press  Company 


1-3-5 

DIVISION  OF  MERCHANDISE  ACCOUNT — Except  in  small  businesses,  the  merchan- 
dise accoiont  as  described  above  is  rarely  found.   Instead,  the  various  ele- 
ments relating  to  purchases,  sales,  return  purchases,  return  sales,  allowances 
on  purchases,  allowances  on  sales,  etc.,  are  segregated  in  separate  accounts. 
Such  accounts  would  appear  as  follows,  with  further  subdivision  as  the  busi- 
ness increases  in  size: 

PURCHASES  ACCOUNT 
DEBIT  CREDIT 

With  purchases  of  merchandise  at       With  return  purchases. 

cost.  With  allowances  on  purchases. 

With  freight,  cartage,  and  other 
charges  thereon. 

The  balance  of  this  account  will  bo  a  debit  and  is  closed  into  the  Trading 
account. 

SALES  ACCOUNT 

DEBIT  CREDIT 

With  freight-out  and  other  charges  With  sales  of  merchandise  at  selling 

on  sales.  price. 
With  return  sales. 
With  allowances  on  sales. 

The  balance  of  this  accoimt  will  be  a  credit  and  is  closed  Into  the  Trad- 
ing account. 

INVENTORY  ACCOUNT 
DEBIT  CREDIT 

With  inventory  of  merchandise  at       With  an  amount  equal  to  the  inventory 
the  close  of  fiscal  period.  at  the  close  of  the  previous  fiscal 

period  already  standing  as  a  debit 
to  this  account. 

The  balance  of  this  account  is  £in  asset  and  will  be  carried  down  as  a 
debit  balance. 

TRADING  ACCOUNT 
DEBIT  CREDIT 

With  balance  of  Purchases  account  at   With  balance  of  Sales  account  at 

close  of  fiscal  period.  close  of  fiscal  period. 

With  inventory  at  the  end  of  the       With  inventory  at  close  of  present 
previous  fiscal  period.  fiscal  period. 

The  balance  of  this  account,  if  a  credit,  shows  the  GROSS  PROFIT  from 
trading;  if  a  debit,  the  GROSS  LOSS  from  trading.   The  balance  is  carried  into 
Profit  and  Loss  account. 

REFERENCES : 

Belding,  pages  12-40 

Oilman,  Chapter  II 

Sprague,  Chapters  I,  II,  III,  Appendix  B 

Copyright,  1917,  The  Ronald  Press  Company 


1-4-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  4 

OPERATION  OF  DOUBLE  ENTRY 


MISCELLANEOUS  QUESTIONS 

Question  8 — What  do  you  understand  by  a  "system  of  internal  check?"  De- 
scribe some  good  or  bad  feature  of  a  system  of  internal  check. 

Question  9 — Record  the  five  transactions  enumerated  in  Question  7,  Lecture 
3,  in  j ournal- entry  form,  giving  full  explanations. 

Question  10 — In  taking  off  a  trial  balance  from  a  ledger  you  find  that  the 
total  debits  equal  the  total  credits.   Do  you  regard  this  as  conclusive  proof 
that  the  books  are  in  balance?  If  the  difference  is  small,  is  it  desirable  to 
write  it  off? 

Question  11 — In  closing  the  cash  book  at  the  end  of  each  month,  what  steps 
must  be  taken?  What  is  the  object  of  opening  a  cash  account  in  the  ledger? 

Question  12 — What  is  the  function  of  a  ledger? 


WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

SUMMARY  OF  TRANSACTIONS 

FEBRUARY  16 
Fred  Miller  withdraws  for  personal  use  in  cash  $150  (charge  Drawing  ac- 
count) . 

FEBRUARY  17 
Pay  New  York  Auto  Supply  Co.  bill  of  February  6,  deducting  discount  of  2%, 
Cash  sales  $98.40. 

FEBRUARY  19 
Office  and  other  supplies  purchased  for  cash,  $35.35.   Purchase  from  the 
Wilson  Manufacturing  Co.,  a  lot  of  goods  for  $1,600,  terms  2%  cash  15  days. 
Pay  salary  of  bookkeeper  $15. 

FEBRUARY  20 
E.  T.  Adams  pays  $50  on  account  of  invoice  dated  February  2.   Ship  to 
Barnhart  k   Co.,  tires  and  other  supplies  $305.75,  terms  2%  cash  10  days. 

Copyright,  1917,  The  Ronald  Press  Company 


I 


1-4-2 
FEBRUARY  21 
Fred  Miller  withdraws  for  personal  use,  in  cash,  $175.  W.  R.  Bell  pays 
invoice  rendered  against  him  on  February  14,  deducting  $36.20  in  respect  of 
discount, 

FEBRUARY  23 
Cash  sales  $391.50.   Purchase  additional  fixtures  from  Chicago  Furniture 
Co.,  $500,  invoice  payable  in  30  days. 

FEBRUARY  26 

Express  charges  of  $2.25  paid  on  goods  returned  by  Barnhart  &  Co.;  and  they 
are  allowed  |105.75  on  the  goods,  which  are  defective.  Petty  office  expenses 
paid,  $12.60.  Fred  Miller  withdraws  for  personal  use  $100  in  merchandise. 

FEBRUARY  27 
Expenses  $21.35  paid  in  cash  in  connection  with  up-keep  of  motor  truck. 
Ship  to  Burnham  Brown  a  wind-shield  and  other  supplies  $184.50,  terms  2%   cash 
10  days. 

FEBRUARY  28 

Burnham  Brown  remits  $490.81  and  is  further  allowed  a  discount  of  $3.69. 
Pay  warehouse  and  other  employees  for  services  rendered  during  the  month  of 
February,  $395.50  (charge  Salaries  account).   C.  H.  Watt  and  W.  R.  Winfield 
remit  the  balance  of  their  accounts. 

Close  the  cash  book  and  post  the  total  cash  receipts  and  the  total  cash 
disbursements  to  the  ledger  cash  account.   All  other  items  having  been  posted, 
draw  off  and  submit  a  trial  balance  of  the  general  ledger. 


Solution  to  Problem  1 


Exhibit  A 


HIGGINS  AND  WILCOX 
STATEMENT  OF  ASSETS  AND  LIABILITIES,  JUNE  30,  1916 


ASSETS 

Land  $  5,000.00 

Buildings  12,000.00 

Machinery  18,000.00 

Other  Equipment  4,000.00 

Inventory  of  Merchandise  29,000.00 

Customers'  Accounts  18,000.00 

Notes  Receivable  3,500.00 

$89,500.00 


LIABILITIES 
Accounts  Payable 
Bank  Loans 

Total  Liabilities 
Net  Worth  or  Capital : 

Higgins       $37,000.00 
Wilcox        40,000.00 


$  7,500.00 
5,000.00 

$12,500.00 


77,000.00 
$89,500.00 


A  year  later  the  following  statement  was  prepared: 

,      Copyright,  1917,  The  Ronald  Press  Company 


1-4-3 


HIGGINS  AND  WILCOX 
STATEMENT  OF  ASSETS  AND  LIABILITIES,  JUNE  30,  1917 


ASSETS 
Land  $  6,500.00 
Machinery  19,500.00 
Buildings  12,000.00 
Warehouse  and  Office  Furni- 
ture and  Fixtures  1,500.00 
Other  Equipment  6,000.00 
Inventory  of  Merchandise  35,000.00 
Customers'  Accounts  17,000.00 
Notes  Receivable  5,500.00 

$103,000.00 


LIABILITIES 
Accounts  Payable 
Bank  Loans 

Total  Liabilities 
Net  Worth,  June  30,  1917 


$18,500.00 
4,000.00 

$22,500.00 
80,500.00 


$103,000.00 


HIGGINS  AND  WILCOX 

STATEMENT  OF  PROFITS 

YEAR  ENDING  JUNE  30,  1917 

Net  Worth  at  June  30,  1917 

Deduct — Net  Worth  at  June  30,  1916 

Increase  in  Net  Worth 

Add — Withdrawals  by  Partners: 

Higgins 

Wilcox 

Balance — Profit  for  the  year  ending  June  30,  1917 

WHICH  IS  DIVIDED  AS  FOLLOWS: 
Higgins  1/3 
Wilcox  2/3 

(As  above) 


Exhibit  B 


$80,500.00 
77,000.00 

$  3,500.00 

$2,000.00 
3,000.00   5,000.00 


$2,833.33 
5,666.67 

$8,500.00 


$8,500.00 


HIGGINS  AND  WILCOX 
CAPITAL  ACCOUNTS,  JUNE  30,  1917 


Exhibit  C 


Balance  as  at  June  30,  1916 

Add — Profits,  year  ending  June  30,  1917 


Deduct — Withdrawals 
Balance  at  June  30,  1917 


HIGGINS      WILCOX     TOGETHER 
$37,000.00  $40,000.00  $77,000.00 
2,833.33    5,666.67    8,500.00 


$39,833.33  $45,666.67  $85,500.00 
2,000.00    3,000.00    5,000.00 


$37,833.33   $42,666.67  $80,500.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-4-4 


Journal  Entry  to  Open  Books  of 

HIGGINS  AND  WILCOX 

on  double  entry  system 

Land  $  6,500.00 

Machinery  19,500.00 

Buildings  12,000.00 

Warehouse  and  Office  Furniture  &  Fixtures  1,500.00 

Other  Equipment  6,000.00 

Inventory  of  Merchandise  35,000.00 

Customers*  Accounts  (already  posted)  17,000.00 

Notes  Receivable  5,500.00 

To — Accounts  Payable  (already  posted)  $18,500.00 

Bank  Loans  4,000.00 

Higgins — Capital  Account  37,833.33 

Wilcox — Capital  Account  42,666.67 


ANSWERS  TO  QUESTIONS 

Answer  to  Question  1 — Two  special  money  columns  may  be  provided  in  both 
day-book  and  cash  book,  the  first  to  contain  items  to  be  posted  to  the  debit 
of  ledger  accounts,  the  second  to  contain  items  to  be  posted  to  the  credit  of 
ledger  accounts.   The  formula  then  would  be: 


(Previous  )  (Total  of)  (Total  of) 

(net  total)+(Daybook)-(Daybook)+(Cash  book)-(Cash  book)=:(debit  )-(credit  ) 
(of  ledger)  (debits  )  (credits)  (debits  )  (credits  )  (ledger  )  (ledger  ) 
(accounts)  (accounts)  (accounts) 


OR  IF  THE  CREDITS  EXCEED  THE  DEBITS: 


(Previous  )  (Total  of)  (Total  of) 

(net  t otal)+ (Daybook)- (Daybook) +( Cash  book)-(Cash  book)=(credit  )-(debit  ) 
(of  ledger)  (credits)  (debits  )  (credits  )  (debits  )  (ledger  )  (ledger  ) 
(accounts)  (accounts)  (accounts) 


Unless  some  such  method  is  followed,  a  proof  of  the  postings  would  require 
a  complete  checking  either  from  the  cash  book  and  day-book  into  the  ledger,  or 
from  the  ledger  into  the  day-book  and  cash  book. 


Copyright,  1917,  The  Ronald  Press  Company 


1-4-5 


Answer  to  Question  2~ 


JOHN  BROWN— CAPITAL  ACCOUNT 


DATE      PARTICULARS   FOLIO   AMOUNT   DATE 
1916  1916 

Dec,   1  Withdrawals    C85    $1,200   Jan.  1  Investment 

Sept.  1  Additional 

Investment 

Dec.  31  Net  Prof it  for 

Dec.   31  Balance  (in  red)       3,400  year        DB42 


PARTICULARS   FOLIO   AMOUNT 

CI     $3,300 

C56     1,000 

300 


$4,600 


1917 
Jan. 


1  Balance 


$4,600 


$3,400 


If  the  account  had  been  kept  as  above  in  the  single-entry  set,  it  would  be 
retained  on  the  double-entry  books,  making  necessary  only  the  writing  of  the 
words  "already  posted"  after  the  item  in  the  opening  journal  entry. 

Answer  to  Question  3 — It  has  been  shown  (Lecture  2)  that  every  business 
transaction  may  be  looked  at  from  two  viewpoints:   (1)  either  (a)  an  increase 
of  assets,  (b)  a  decrease  of  liabilities,  or  (c)  a  decrease  of  proprietorship; 
and  (2)  either  (a)  decrease  of  assets,  (b)  an  increase  of  liabilities,  or  (c) 
an  increase  of  proprietorship.   It  follows,  therefore,  that  there  are  nine 
different  kinds  of  transactions  according  to  this  analysis.    Group  1  is 
called  "debit,"  and  Group  2  is  called  "credit."   It  is  necessary  for  one  not 
familiar  with  accounts  to  examine  each  transaction  presented  on  some  such 
basis  until  the  matter  of  "what  to  debit  and  what  to  credit"  becomes  second 
nature. 

An  understanding  of  the  "accountability"  theory  is  also  helpful.   (See 
Cole,  Chapter  II, ) 

Answer  to  Question  4-- 

(a)  ASSETS  are  the  properties  (real  or  personal,  tangible  or  intangible) 
of  a  business  or  person,  generally  expressed  in  accounting  in  terms  of  money 
value . 

(b)  LIABILITIES  are  moneys  owing  by  a  business  or  person  to  others.   The 
term  sometimes  includes  the  proprietor's  interest  in  the  business. 

(c)  The  NET  WORTH  of  a  business  is  the  difference  between  its  total  as- 
sets and  its  liabilities  (to  outsiders).   It  is  synonymous  here  with  PROPRIE- 
TORSHIP, NET  CAPITAL  INVESTMENT,  etc. 

(d)  BOOKKEEPING  is  the  art  of  keeping  chronological  and  systematic  rec- 
ords of  business  treinsactions. 

(e)  "ACCOUNTING  is  the  science  which  treats  of  the  systematic  record, 
compilation  and  presentation  in  a  comprehensive  manner  of  the  financial  opera- 
tions of  a  business."   (Committee  on  Accounting  Terminology,  American  Associa- 
tion of  Public  Accountants.) 


Copyright,  1917,  The  Ronald  Press  Company 


1-4-6 
OPERATION  OF  DOUBLE  ENTRY 

SYSTEM  OF  INTERNAL  CHECK — A  system  of  internal  check  resembles  in  prin- 
ciple the  "system  of  checks"  imposed  by  the  Constitution  on  the  Federal  gov- 
ernment.  In  a  small  business  employing  a  combined  bookkeeper  and  cashier  no 
such  system  of  checks  is  possible.   But  in  a  corporation  with  a  large  number 
of  employees  engaged  on  the  bookkeeping  records,  a  system  of  internal  check  is 
most  necessary  and  serves  four  main  purposes: 

1.  To  facilitate  the  prompt  handling  of  accounts. 

2.  To  put  responsibility  on  the  proper  officials. 

3.  To  decrease  chances  of  error. 

4.  To  decrease  chances  of  fraud. 

The  details  of  what  a  system  of  internal  check  should  embrace  are  outlined 
in  Montgomery's  Auditing,  pages  53-58. 

JOURNALIZING — Too  much  emphasis  cannot  be  put  on  the  method  of  making  en- 
tries in  books  of  original  entry.   Review  the  principles  laid  down  in  the 
study  of  bookkeeping.  Attention  should  be  paid  to  the  following  points: 

1.  The  form  of  the  book  of  original  entry  (cash  book,  sales  book,  general 
journal,  etc.)  must  be  such  that  sufficient  space  is  allowed  for  full  record 
of  the  entry. 

2.  Accounts  to  be  credited  and  debited  must  be  clearly  indicated  so  that 
the  ledger-keeper  need  have  no  doubt  of  where  to  post. 

3.  Authorization  for  the  entry  should  be  shown  where  necessary,  this  be- 
ing effected  in  some  cases  by  the  proper  official  initialing  the  entry. 

4.  A  JOURNAL  VOUCHER  is  recommended  for  the  general  journal  where  the 
latter  receives  only  the  more  unusual  entries  and  where  the  entries  are  rela- 
tively few.   This  voucher  should  be  passed  upon  and  approved  before  the  entry 
is  made.   It  has  the  advantage  of  providing  a  folder  in  which  papers,  etc., 
relating  to  the  entry  may  be  filed. 

POSTING — Care  should  be  taken  that  the  correct  reference  is  given  when 
postings  are  made  both 

1.  In  the  ledger  to  record  the  page  number  and  the  journal  in  which 

the  entry  appears  ;  and 

2.  In  the  journal  to  record  the  number  of  the  account  to  which  the 

entry  is  posted. 

Where  a  large  number  of  entries  are  made  daily,  it  is  of  importance  to 
keep  a  constant  check  on  the  accuracy  of  the  postings  in  addition  to  taking 
the  monthly  trial  balance.   There  are  several  methods  of  verifying  the  daily 
entries. 

Copyright,  1917,  The  Ronald  Press  Company 


1-4-7 
TRIAL  BALANCE — A  trial  balance  is  a  statement  of  all  the  "open"  accounts 
(accounts  the  sum  of  whose  debits  £ind  credits  are  not  equal)  in  a  ledger,  show- 
ing in  two  parallel  money  columns  either  the  total  of  the  debit  side  and  the 
total  of  the  credit  side  of  each  account,  or  the  difference  between  the  debit 
and  credit  sides  of  each  account.   In  a  trial  balance  taken  from  a  general 
ledger,  the  total  debits  should  equal  the  total  credits  if  the  posting  has 
been  done  correctly. 

The  purpose  of  the  trial  balance  is  two-fold: 

1.  To  prove  that  the  ledger  is  in  balance. 

2.  To  be  used  as  a  basis  for  preparing  financial  statements. 

If  the  totals  of  the  trial  balance  are  correct,  such  evidence  should  not 
be  taken  to  mean  that  no  errors  have  been  made.   Postings  to  wrong  accounts 
and  offsetting  errors  will  not  be  detected. 

ERRORS — Errors  in  the  bookkeeping  records  caused  by  mistake,  ignorance,  or 
fraud  may  be  classified  under: 

1.  ERRORS  OF  PRINCIPLE.   The  most  important  error  falling  under  this  head 
is  the  charging  of  expenses  to  asset  accounts  or  vice  versa.   The  result  in 
the  first  instance  would  be  an  overstating,  and  in  the  latter,  an  understating 
of  both  assets  and  profits.   This  point  will  be  taken  up  later  in  the  discus- 
sion of  CAPITAL  AND  REVENUE  EXPENDITURES.   A  wrong  interpretation  of  the 
classification  of  accounts  would  also  lead  to  errors  of  principle,  though  not 
always  affecting  the  balance  sheet. 

2.  CLERICAL  ERRORS.  Errors  of  posting,  footing,  and  balancing  are  classi- 
fied here. 

3.  ERRORS  OF  OMISSION.   These  consist  of  failures  to  make  entries  such  as 
sales  to  customers  on  account,  etc. 

4.  ERRORS  OF  COMMISSION.   Errors  in  recording  entries,  as  mistakes  in 
amount,  pricing,  quantities,  extensions  (on  invoices),  are  included  under 
errors  of  commission. 

5.  OFFSETTING  ERRORS.   These  errors  are  not  common.   The  term  refers  to 
errors  of  posting,  footing,  or  balancing  which  are  exactly  counterbalanced  by 
other  such  errors  and.   thus  would  not  be  disclosed  by  a  trial  balance. 

REFERENCES : 

Belding,  pages  41-57 
Greendlinger  and  Schulze,  Chapter  IX 
MacFarland  and  Rossheim,  pages  22-36. 
Sprague,  Chapters  XIV,  XV,  XIX,  XX 


Copyright,  1917,  The  Ronald  Press  Company 


1-5-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  5 
PREPARATION  OF  FINANCIAL  STATEMENTS 


Problem  2  / 

From  the  following  trial  balance  abstracted  from  the  books  of  the  retail 
business  of  H.  A.  Walters,  October  31,  1917,  prepare: 

(a)  Balance  sheet  as  of  October  31,  1917. 

(b)  Statement  of  profit  and  loss  for  the  year  ending  October  31, 

1917,  using  the  report  form  of  statement, 

(c)  Journal  entries  necessary  to  close  the  books  as  of  October  31, 

1917. 


ACCOUNT 
Land 
Building 
Store  Fixtures 
Delivery  Equipment 
Bond  Investments 

Inventory  of  Merchandise,  November  1,  1916 
Notes  Receivable 
Accounts  Receivable 
Cash 

Accounts  Payable 
Mortgage  Payable 
H.  A.  Walters — Capital  Account 
H.  A.  Walters — Drawing  Account 
Merchandise 

Income  on  Bond  Investments 
Rent  Received 
Interest  Received 
Sales  Clerks'  Salaries 
Selling  Expenses 
Advertising  Expenses 
Delivery  Expenses 
Office  Expenses 
General  Expenses 
Interest  Paid 
Merchandise  Discounts 


DEBIT 

3,000.00 
10,000.00 

4,000.00*^ 
500.00 
11,000.00' 

9,462.00 

1,800.00' 
18,640.0a 

3,240.00  ^ 


1,302.00 
46,982.00 


5,800.00 
3,200.00 
1,600.00 
1,300.00 
2,900.00 
3,650.00 
300.00 
680.00 

5129,356.00 


CREDIT 


$12,846.00" 
5,000.00 
40,000.00 

69,420.00 
420.00 
760.00 
910,00 


$129,356,00 


The  merchandise  inventory  October  31,  1917,  is  $15,480;  delivery  expense 
supplies  inventory  is  $160;  and  general  expense  supplies  inventory  is  $240. 


Copyright,  1917,  The  Ronald  Press  Company 


1-5-2 
An  analysis  of  the  merchandise  account  shows  purchases  $42,800,  return 
purchases  $4,913,  freight  on  purchases  $1,200,  allowances  on  purchases  $487, 
sales  $64,020,  and  return  sales  $2,982. 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

In  the  Journal  make  the  entries  necessary  to  close  the  books  of  Fred 
Miller  on  February  28.   The  inventory  of  merchandise  on  that  date  is  $10,890. 
Prepare  to  be  handed  in: 

(a)  Statement  of  profit  and  loss  for  the  month  ending  February  28, 

19 — ,  using  the  account  form. 

(b)  Balance  sheet  February  28,  19 — 

The  following  is  the  trial  balance  of  the  ledger  of  Fred  Miller  February 
28,  before  closing. 

FRED  MILLER 
TRIAL  BALANCE,  FEBRUARY  28,  19— 

ACCOUNT 
Fred  Miller — Capital  Account 
Fred  Miller — Drawing  Account 
Warehouse  and  Office  Fixtures 
Auto  Delivery  Truck 
Merchandise  Inventory 
E.  T.  Adams 
Barnhart  &  Co. 
Geo.  Wilson 
Cash 

Wilson  Manufacturing  Co. 
Chicago  Furniture  Co. 
New  York  Auto  Supply  Co. 
Merchandise 
Salaries 
Rent 

Stationery  and  Supplies 
General  Expense 
Interest 

Discount  on  Sales 
Discount  on  Purchases 


DEBIT 

CREDIT 

$11,289.30 

$  425.00 

1,250.00 

1,750.00 

2,197.50 

212.50 

200.00 

230.00 

1,183.52 

1,600.00 

500.00 

1,350.00 

6,818.10 

440.50 

50.00 

53.75 

78.80 

.49 

39.89 

189.77 

$14,929.56 

$14,929.56 

ANSWERS  TO  QUESTIONS 

Answer  to  Question  5 — 

CAPITAL  ASSETS  are  those  assets  WITH  which  a  business  operates;  i.e., 
assets  which  are  more  or  less  permanent,  and  are  acquired  to  be  used  for  busi- 
ness purposes  rather  than  for  resale.  Examples  are  land,  buildings,  equip- 
ment, tools,  fixtures,  etc.  (TANGIBLE  capital  assets),  and  patent  rights, 
good-will,  etc.  (INTANGIBLE  capital  assets). 


Copyright,  1917,  The  Ronald  Press  Company 


1-5-3 

CURRENT  ASSETS  are  those  assets  IN  which  a  business  operates;  i.e.,  assets 
which  are  held  more  or  less  temporarily  and  which  consist  of  cash,  credits  ex- 
tended in  lieu  of  cash  (accounts  and  notes  receivable),  and  merchandise  inven- 
tories which  will  soon  be  turned  into  cash  or  credit.   The  term  "current 
assets"  also  generally  includes  items  sometimes  classified  as  "working 
assets,"  that  is,  raw  materials,  work  in  the  process  of  manufacture,  supplies 
of  stationery,  coal,  etc. 

CAPITAL  LIABILITIES  are  not  liabilities  in  the  ordinary  sense  of  the 
word,  but  represent  the  investment  of  the  proprietor.   Or,  stated  in  Einother 
way,  capital  liabilities  are  the  liabilities  of  the  business  to  the  propri- 
etor.  The  term  may  also  include  long-term  liabilities,  such  as  bonds. 

CURRENT  LIABILITIES  are  liabilities  which  are  currently  due;  that  is, 
those  becoming  due  within  a  year  or  less. 

Answer  to  Question  6 — 

Warehouse  and  Office  Fixtures 

Auto  Delivery  Truck 

Merchandise  Inventory        )  Asset 

Accounts  Receivable 

Notes  Receivable 

Cash  )  )  Real 

Fred  Miller — Capital  Account 
Fred  Miller — Drawing  Account 
Accounts  Payable 

Merchandise 

Salaries  )  )  Nominal 

Rent 

Stationery  and  Supplies 

Expense 

Interest 

Discount 


Liability 


Income  and 
Expense 


Expense 


Accounts  Receivable  and 
Accounts  Payable  and  the 
Proprietor's  accounts 
are  personal  accounts ; 
the  remainder  are  im- 
personal accounts 


Answer  to  Question  7 — 

DATE       PARTICULARS 
1917 
Sept.  5  Returned  Purchases 

16  Sale 

25  Check 


C  D  CO.— CURRENT  ACCOUNT 


AMOUNT 

$  306.00 
1,670.00 
2,000.00 


DATE      PARTICULARS 
1917 
Sept.   1  BalEince 

3  Purchases 
20  AllowEince  on  Sale 


AMOUNT 

$1,856.00 

3,450.00 

320.00 


30  Balance  carried  down  1,650.00 


$5,626.00 


$5,626.00 


Oct.  1  Balance  brought  down  $1,650.00 

Since  the  balance  of  the  account  is  a  credit,  it  should  appear  among  the 
liabilities. 


Copyright,  1917,  The  Ronald  Press  Company 


1-5-4 


CLOSING  THE  BOOKS 


By  "closing  the  books"  is  meant  the  operation  at  the  end  of  a  FISCAL  (or 
Accounting)  period — month  or  year — required  to  close  out  the  nominal  accounts 
into  the  Profit  and  Loss  account,  and  the  Profit  and  Loss  account  into  the 
proprietor's  account.   There  are  two  main  purposes  of  such  an  operation: 

1.  To  ascertain  the  net  profit  or  loss  for  the  year  and  to  credit  or 

debit  same  to  the  proprietor's  account. 

2.  To  secure  for  each  period  an  analysis  of  the  details  and  results 

of  operation  which  will  be  valuable  for  subsequent  comparison. 

After  all  postings  have  been  completed  at  the  end  of  a  period,  a  trial 
balance  is  taken  and  journal  entries  are  made  to  close  the  nominal  accounts. 
Consider  the  following  trial  balance: 


TRIAL  BALANCE  OF  JOHN  DOE,  DECEMBER  31,  1917 


John  Doe — Capital  Accoimt 

John  Doe — Drawing  Account 

Land 

Buildings 

Office  Fixtures 

Delivery  Equipment 

Investments 

Cash 

Customers'  Accounts 

Notes  Receivable 

Inventory  of  Merchandise,  January  1,  1917 

Creditors'  Accounts 

Notes  Payable 

Bank  Loans 

Merchandise 

Selling  Expense 

Advertising 

Salaries 

General  Expense 

Delivery  Expense 

Stationery  and  Supplies 

Insurance 

Rent  Paid 

Interest  Paid 

Income  on  Investments 

Interest  Received 

Merchandise  Discounts 


2,200.00 
4,000.00 

12,000.00 
3,000.00 
1,000.00 

10,000.00 
2,000.00 

18,000.00 
3,000.00 

10,000.00 


44,000.00 

2,000.00 

400.00 

6,000.00 

5,000.00 

300.00 

1,600.00 

100.00 

600.00 

200.00 


$  31,400.00 


20,000.00 
5,000.00 
6,000.00 

61,000.00 


$125,400.00 


1,000.00 
600.00 
400.00 

$125,400.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-5-5 


CREDITS 

$40,000.00 

Sales 

$60,000.00 

1.000.00 

Purchase  Rebates  &  Allow- 

1,200.00 

ances 

400.00 

800.00 

Return  Purchases 

600.00 

1,000.00 

Total 

$44,000.00 

$61,000.00 

The  following  is  an  analysis  of  the  Merchandise  account: 
DEBITS 
Purchases 

Sales  Rebates  &  Allowances 
Return  Sales 
Freight -Out 
Freight-In 

Total 


The  inventories  on  hand  December  31,  1917,  are  merchandise  $15,000,  and 
stationery  and  supplies  $1,000. 

Closing  entries  may  be  made  in  the  journal  as  follows: 

(1) 

Merchandise  $10,000.00 

To — Inventory  of  Merchandise,  December  31, 
1916 
To  transfer  opening  inventory  into  Merchan- 
dise account 


$10,000.00 


(2) 
Inventory  of  Merchandise,  December  31,1917 

To — Merchandise 
To  record  closing  inventory  as  per  recapitu- 
lation of  inventory  sheets. 


15,000.00 


15,000.00 


The  purpose  of  the  two  entries  above  may  be  seen  from  the  study  of  the 
following  equation:   (Review  also  the  discussion  of  the  Merchandise  account  in 
1-3-4) 

(Inventory  at)  (Purchases)  (  Cost  of  )  (Inventory) 
(  beginning  )  Plus  (  during  )  -  (  Merchan-  )  Plus  (at  end  of) 
(  of  period  )      (  period  )    (dise  sold)      (  period  ) 

or  transposing  the  last  item,  the  opening  inventory  ($10,000)  PLUS  the  pur- 
chases during  the  year  ($40,000  +  $1,000  -  $400  -  $600,  or  $40,000)  LESS  the 
closing  inventory  ($15,000)  =  the  cost  of  the  merchandise  disposed  of  by  sales 
($35,000).   By  the  medium,  therefore,  of  entries  (1)  and  (2)  we  now  have  items 
in  the  Merchandise  account  which  show  the  cost  of  merchandise  sold.   The  re- 
maining items  in  the  Merchandise  account  show  the  net  sales  ($60,000  -  $1,000 
-  $1,200  -  $800,  or  $57,000).   The  difference  between  the  net  sales  and  the 
cost  of  sales  is  gross  profit  and  is  transferred  to  the  Profit  and  Loss 
account. 


(3) 

Merchandise 

To — Profit  and  Loss 
To  tremsfer  gross  profit  from  trading. 


$22,000.00 


$22,000.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-5-6 
In  case  the  details  of  the  Merchandise  account  are  carried  in  separate 
accoiints,  as  outlined  in  1-3-5,  journal  entries  would  be  necessary  to  transfer 
(a)  opening  inventory  into  Trading  account,  (b)  net  purchases  to  Trading  ac- 
count, (c)  closing  inventory  from  Trading  to  Inventory  account,  (d)  net  sales 
to  Trading  account,  and  (e)  gross  profit  from  Trading  to  Profit  and  Loss  ac- 
count. 

If  the  inventory  is  carried  in  the  Merchandise  account,  as  in  the  descrip- 
tion of  the  account  appearing  in  1-3-4,  entry  (1)  as  above  would  not  be  made. 
In  place  of  entries  (1)  and  (2)  would  appear  the  following: 


Merchandise 

T  0 — Me  r  chand  i  s  e 
To  record  closing  inventory  December  31,  1917, 


$15,000.00 


$15,000.00 


The  credit  of  $15,000  would  then  be  posted,  but  before  posting  the  debit 
of  $15,000,  a  second  entry  would  be  made  precisely  similar  to  entry  (3)  and 
posted,  after  which  the  Merchandise  account  would  balance.   The  latter  account 
is  then  ruled  off  and  the  debit  of  $15,000  posted.   This  is  an  asset  and  would 
therefore  remain  as  an  opening  item  in  the  Merchandise  account  for  the  next 
fiscal  period. 


(4) 
Inventory  of  Stationery  and  Supplies 
To — Stationery  and  Supplies 
To  set  up  inventory  of  supplies  not  consumed. 


$1,000.00 


$1,000.00 


The  Stationery  and  Supplies  account  is  a  mixed  account  and  the  purpose  of 
the  above  entry  is  to  separate  the  inventory,  which  will  remain  on  the  books 
as  an  asset,  from  the  nominal  part  of  the  account  which  will  be  disposed  of  by 
closing  out  to  Profit  and  Loss. 


(5) 
Income  on  Investments 
Interest  Received 
Merchandise  Discounts 
To — Profit  and  Loss 
To  transfer  income  accounts  to  Profit  and  Loss. 


$1,000.00 
600.00 
400.00 


$2,000.00 


(6) 


Profit  and  Loss 

To — Selling  Expense 
Advertising 
Salaries 
General  Expense 
Delivery  Expense 
Stationery  and  Supplies 
Insurance 
Rent  paid 
Interest  paid 
To  close  out  expenses  for  year. 


15,200.00 


2,000.00 
400.00 
6,000.00 
5,000.00 
300.00 
600.00 
100.00 
600.00 
200.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-5-7 
It  is  customary,  when  posting  to  the  Profit  and  Loss  account,  to  show  full 
details  of  the  entry.   Thus,  in  entry  (6),  instead  of  posting  a  single  debit 
of  $15,200,  the  detailed  expenses  making  up  the  total  are  shown  instead. 


(7) 

Profit  and  Loss  $8,800.00 

To — John  Doe — Drawing  Account  $8,800.00 

To  carry  net  profit  for  year  to  drawing  account. 


(8) 

John  Doe — Drawing  Account  6,600.00 

To — John  Doe — Capital  Account  6,600.00 

To  tj'ansfer  balance  of  drawing  account  to  capital  account. 


After  the  last  two  entries  have  been  made  there  will  be  left  on  the  books 
only  real  (asset  and  liability)  accounts. 


PREPARATION  OF  FINANCIAL  STATEMENTS 

From  the  foregoing  discussion  it  is  evident  that  two  statements  may  be 
prepared  from  the  information  disclosed  by  the  books  ;  and  it  is  the  purpose  of 
FINANCIAL  STATEMENTS  to  present  this  information  in  a  simple  but  comprehensive 
manner.   The  first  of  these  statements  to  be  prepared  will  be  the  STATEMENT  OF 
PROFIT  and  LOSS  or  STATEMENT  OF  PROFITS  AND  INCOME  and  will  consist  of  an  ar- 
rangement of  the  nominal  accounts  designed  to  set  out  clearly  the  results  from 
operations  for  the  period  under  review;  the  second  will  be  the  BALANCE  SHEET 
(called  STATEMENT  OF  ASSETS  AND  LIABILITIES  in  single  entry)  and  will  consist 
of  a  grouping  of  the  real  accounts  remaining  in  the  ledger  after  the  nominal 
accounts  have  been  closed  out,  according  to  some  conventional  scheme,  for  the 
purpose  of  setting  forth  the  financial  condition  at  a  particular  moment  of 
time. 

STATEMENT  OF  PROFIT  AND  LOSS  OR  OF  PROFITS  AND  INCOME 

The  preferable  term  to  employ  as  a  title  to  this  statement  is  STATEMENT  OF 
PROFITS  AND  INCOME,  inasmuch  as  the  significant  points  in  the  statement  are 
(1)  the  sources  of  income,  (2)  the  income  expended  during  the  course  of  opera- 
tions, and  (3)  the  income  remaining  at  the  close  of  the  period  in  the  shape  of 
distributable  profit.   The  first-named  term  is  more  commonly  used,  but  it 
labors  under  the  disadvantage  of  being  a  misnomer.   In  a  business  which  has    ' 
made  profits,  the  inclusion  of  the  word  "loss"  is  contradictory,  the  only  de- 
fense being  that  "loss"  is  used  to  refer  to  "expenses." 

ACCOUNT  FORM — An  analysis  of  profits  that  sometimes  suffices  is  the 
ACCOUNT  FORM  of  statement.   This  is  merely  a  summary  presentation  of  the 
nominal  ledger  accounts  and  would  appear  as  follows: 

Copyright,  1917,  The  Ronald  Press  Company 


JOHN  DOE,  PROPRIETOR 

STATEMENT  OF  TRADING,  PROFIT  AND  LOSS 

YEAR  ENDING  DECEMBER  31,  1917 

TRADING  ACCOUNT 


1-5-8 


Merchandise  on  Hand,  January 

1,  1917 
Purchases  for  year 
Freight-In 
Allowances  on  Sales 
Return  Sales 
Freight -Out 
Balance — Gross  Profit  from 

Trading  carried  down 


Gross  Sales 
$10,000.00   Allowances  on  Purchases 


40,000.00 

1,000.00 

1,000.00 

1,200.00 

800.00 

22,000.00 


$76,000.00 


Return  Purchases 
Merchandise  on  Hand, 
December  31,  1917 


$60,000.00 
400.00 
600.00 

15,000.00 


$76,000.00 


PROFIT  AND  LOSS  ACCOUNT 


Selling  Expense 
Advertising 
Salaries 
General  Expense 
Delivery  Expense 
Stationery  and  Supplies 
Insurance 
Rent 

Balance — Net  Profit  from 
operation  carried  down 


$2,000.00 
400.00 
6,000.00 
5,000.00 
300.00 
600.00 
100.00 
600.00 

7,000.00 

$22,000.00 


Gross  Profit  from  Trading 
brought  down 


$22,000.00 


$22,000.00 


Interest  Paid 

Balance — Surplus  Net  Profit 
carried  to  Drawing  Account 


$200.00 
8,800.00 

$9,000.00 


Net  Profit  from  operation 

brought  down 
Income  from  Investments 
Interest  Received 
Merchandise  Discoimts 


$7,000,00 

1,000.00 

600.00 

400.00 

$9,000.00 


The  last  division  of  the  Profit  and  Loss  account  is  made  for  the  purpose 
of  displaying  "net  profit  from  operation"  as  distinguished  from  "surplus  net 
profit."   Miscellaneous  receipts  such  as  interest,  and  expenses  such  as  in- 
terest paid,  are  sometimes  classified  as  "non-operating  income  and  expenses," 
but  the  line  of  demarcation  between  this  class  of  income  and  expense  and  that 
found  in  the  first  section  of  the  Profit  and  Loss  account  is  not  always  clear, 


Copyright,  1917,  The  Ronald  Press  Company 


1-5-9 

REPORT  FORM — A  aiuch  clearer  method  of  stating  profits  Is  Dy  use  of  the 
report  form. 


JOHN  DOE 

STATEMENT  OF  PROFITS  AND  INCOME 

YEAR  ENDING  DECEMBER  31,  1917 


GROSS  SALES 

DEDUCT — Rebates  and  Allowances 

Return  Sales 

Freight-Out 

NET  SALES 

DEDUCT— COST  OF  GOODS  SOLD: 

Inventory,  January  1,  1917 
Add — I*ur  chases 
Freight-In 


Deduct — Returns  and  Allowances 


$40,000.00 
1,000.00 

$41,000.00 
1,000.00 


P 


Cost  of  Merchandise  Handled 

Deduct — Inventory,  December  31,  1917 

GROSS  PROFIT  FROM  SALES 

DEDUCT— ADMINISTRATIVE  AND  SELLING  EXPENSE: 
Salaries 
General  Expense 
Stationery  and  Supplies 
Insurance 
Rent 

Selling  Expense 
Advertising 
Delivery  Expense 

NET  PROFIT  FROM  OPERATION 

ADD— MISCELLANEOUS  INCOME: 

Income  from  Investments 
Interest  Received 
Merchandise  Discounts 


DEDUCT— Interest  Paid 

SURPLUS  NET  PROFITS  carried  to  Proprietor's  Account 


$1,000.00 

1,200.00 

800.00 


$10,000.00 


40,000.00 

$50,000.00 
15,000.00 


$6,000.00 

5,000.00 

600.00 

100.00 

■  600.00 

2,000.00 

400.00 

300.00 


$1,000.00 
600.00 
400.00 


$60,000.00 

3,000.00 
$57,000.00 


35,000.00 


$22,000.00 


15,000.00 


$7,000.00 


2,000.00 

$9,000.00 
200.00 

$8,800.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-5-10 


BALANCE  SHEET 


There  are  two  ways  in  which  balance  sheets  are  prepared:  (1)  with  capital 
assets  preceding  current  assets  and  capital  liabilities  preceding  current  lia- 
bilities ;  or  (2)  with  current  assets  preceding  capital  assets  and  current  lia- 
bilities preceding  capital  liabilities.   In  either  case, in  American  practice, 
the  assets  are  on  the  left  and  liabilities  on  the  right,  and  both  assets  and 
liabilities  are  grouped. 

1.  In  the  following  illustration  capital  assets  precede  the  current,  or 
the  more  liquid  follow  the  less  liquid: 


JOHN  DOE 
BALANCE  SHEET,  DECEMBER  31,  1917 


ASSETS 
CAPITAL  ASSETS: 

Land  $4,000.00 

Buildings  12,000.00 
Office  Fixtures  3,000.00 
Delivery  Equip- 


CAPITAL  AND  LIABILITIES 
CAPITAL  ACCOUNT: 

Balance,  January  1,  1917   $31,400.00 
Add — Profit  for  year        8,800.00 


ment 
Investments 

CURRENT  ASSETS: 

Inventory  of 
Mdse. 

Inventory  of 
Supplies 

Customers'  Ac- 
counts 

Notes  Re- 
ceivable 

Cash 


1,000.00 
10,000.00  $30,000.00   Deduct — Drawings 


$40,200.00 
2,200.00 


$15,000.00 

1,000.00 

18,000.00 


Balance,  December  31,  1917  $38,000.00 
CURRENT  LIABILITIES: 
Accounts  Pay- 
able $20,000.00 


Notes  Payable 
Bank  Loans 


5,000.00 

6,000.00  31,000.00 


3,000.00 

2,000.00  39,000.00 


$69,000.00 


$69,000.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-5-11 

2.  In  the  following  illustration  current  assets  precede  the  capital,  or 
the  less  liquid  follow  the  more  liquid: 

JOHN  DOE 
BALANCE  SHEET,  DECEMBER  31,  1917 


CURRENT  ASSETS: 

Cash 

Notes  Re- 
ceivable 

Customers'  Ac- 
counts 

Inventory  of 
Mdse. 

Inventory  of 
Supplies 


ASSETS 

$2,000.00 

3,000.00 

18,000.00 

15,000.00 

1,000.00  $39,000.00 


LIABILITIES  AND  CAPITAL 
CURRENT  LIABILITIES: 
Accounts  Pay- 
able $20,000.00 
Notes  Payable     5,000.00 
Bank  Loans        6,000.00  $31,000.00 


CAPITAL  ASSETS: 

Land  $4,000.00 
Buildings  12,000.00 
Office  Fixtures  3,000.00 
Delivery  Equip- 
ment 1,000.00 
Investments  10,000.00  30,000.00 


CAPITAL  ACCOUNT: 
Balance,  Jan- 
uary 1,  1917   $31,400.00 
Add — Profit  for 

year  8,800.00 


$40,200.00 
Deduct — Drawings  2,200.00 


Balance,  December  31,  1917  $38,000.00 


$69,000.00 


$69,000.00 


If  the  inclusion  of  all  individual  ledger  accounts  should  make  either  state- 
ment too  complex,  assets  of  like  character  should  be  totaled  and  the  total 
only  shown  on  the  statement.   This  total  should  then  be  supported  by  a 
separate  schedule  listing  the  detail  items.   A  similar  treatment  may  be 
adopted  for  liabilities,  capital  accounts,  expenses,  etc. 

REFERENCES : 

Oilman,  Chapter  IV 

Greendlinger  &  Schulze,  Chapters  XIII,  XIV 

Lisle,  pages  55-63 


Copyright,  1917,  The  Ronald  Press  Company 


1-6-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  6 

PARTNERSHIPS 


Problem  3 

The  following  trial  balance  has  been  abstracted  from  the  books  of  H.  A. 
Cole  who  has  now  entered  into  a  partnership  agreement  with  W.  H.  Nelson: 


PARTICULARS 
Land 

Buildings 

Machinery  and  Tools 
Notes  Receivable 
Customers'  Accounts 
Accounts  Payable 
Notes  Payable 
Cash 

Merchandise  (Inventory) 
H.  A.  Cole — Capital  Account 


DEBITS 

$12,000.00 

13,000.00 

12,000.00 

2,700.00 

15,500.00 


2,100.00 
37,500.00 


$94,800.00 


CREDITS 


$12,200.00 
6.000.00 


76,600.00 
$94,800.00 


It  was  agreed  in  the  articles  of  copartnership  that  H.  A.  Cole  was  to  con- 
tribute the  assets  and  liabilities  represented  in  the  above  trial  balance,  and 
that  W.  H.  Nelson  was  to  contribute  cash  $25,000,  land  $4,000,  buildings 
$20,000,  and  notes  receivable  $6,000. 

Prepare  the  entries  necessary  to: 

(a)  Record  on  the  books  of  H.  A.  Cole  the  transfer  of  the  assets  and 

liabilities  to  the  new  firm  of  Cole  and  Nelson. 

(b)  Open  the  books  of  the  new  firm  with  respect  to  the  contribution  of 

each  partner. 

Problem  4 

Fred  Mack  and  John  Schmidt  are  engaged  as  partners  in  a  general  merchan- 
dise business  known  as  Mack  &  Schmidt.  A  clause  of  the  partnership  agreement 
respecting  the  division  of  profits  and  losses  reads  as  follows: 

■The  books  shall  be  closed  annually,  at  December  31  of  each  year,  for  the 
ascertainment  of  profits  and  the  adjustment  of  the  interests  of  the  partners. 
During  the  existence  of  this  partnership  Fred  Mack  shall  be  allowed  a  salary 
of  $6,000  per  annum,  and  John  Schmidt  a  salary  of  $4,000  per  annum,  payable 
monthly. 

Copyright,  1917,  The  Ronald  Press  Company 


1-6-2 

"Interest  at  6%  per  annum  shall  be  allowed  on  the  balances  of  their  cap- 
ital account  at  the  beginning  of  each  fiscal  year. 

"Drawings  shall  not  exceed  the  salary  allowances  of  the  partners,  as 
aforesaid,  except  by  mutual  consent. 

"The  remaining  profit  or  loss,  as  the  case  may  be,  shall  be  divided  equal- 
ly between  the  partners," 

Mack's  capital  account  on  January  1,  1917,  was  |70,000  and  Schmidt's 
$50,000.   No  adjustments  were  made  for  partners'  salaries,  but  Mack's  drawing 
account  showed  withdrawals  during  the  year  of  $4,000,  and  Schmidt's  of  $5,000. 
The  excess  drawing  of  Schmidt  had  been  made  with  the  knowledge  and  consent  of 
Mack. 

Upon  closing  the  books  on  December  31,  1917,  the  net  profit,  before  allow- 
ing for  partners'  salaries  or  interest  on  their  capital,  was  ascertained  to  be 
$11,000. 

You  are  required  to  prepare: 

(a)  Statement  showing  division  of  net  profit  for  year  ending  December 

31,  1917. 

(b)  Statement  of  partners'  capital  accounts  as  of  December  31,  1917. 

MISCELLANEOUS  QUESTIONS 

Question  13 — Doe  and  Roe  enter  into  a  partnership.  Doe  investing  real 
estate  valued  in  the  partnership  agreement  at  $10,000,  and  Roe  investing 
$8,000  in  cash.   The  partnership  agreement  stated  that  profits  and  losses  were 
to  be  divided  equally.  During  the  year  the  real  estate  was  sold  for  $12,000. 
The  business  was  unsuccessful,  and  at  the  end  of  the  year  it  was  found,  after 
liquidation,  that  there  was  a  loss  of  $3,000  before  considering  the  real 
estate  transaction. 

The  partners  wish  to  know  how  much  each  one  is  entitled  to. 

Question  14 — The  balance  sheet  of  James  and  Smith  appears  on  December  31, 
19 — ,  as  follows: 

BALANCE  SHEET  OF  JAMES  AND  SMITH 

Miscellaneous  Assets        $30,000.00   James — Capital  Account     $10,000.00 

Smith — Capital  Account      20,000.00 


$30,000.00  $30,000.00 


They  divide  profits  and  losses.  Smith  2/3  and  James  1/3. 

Smith  sells  a  half  of  his  interest  to  Cole  for  $15,000  and  a  new  partner- 
ship is. formed,  each  partner  to  have  a  one-third  interest  in  the  assets. 

Formulate  the  entry  necessary  to  give  effect  to  the  above  change  on  the 
books  of  James  and  Smith. 

Question  15 — Continuing  the  illustration  in  Question  14,  assume  the  agree- 
ment had  been  that  Cole  is  to  receive  a  third  interest  in  the  capital  of  the 
business  by  investing  $7,000  in  cash,  and  formulate  the  journal  entries  re- 
quired to  adjust  the  capital  accounts  of  the  partners. 

Copyright,  1917,  The  Ronald  Press  Company 


Question  16 — Distinguish  between  trade  and  cash  discount.   What 
meaning  of  7/10,  n/60?  Is  this  cash  discount  or  trade  discount? 


1-6-3 

is  the 


Question  17 — An  invoice  amounting  to  $1,000  reads:  "less  30%,  10%  and  5%; 
terms  2/10,  n/30."   It  is  dated  August  16  and  is  paid  on  the  18th.  What 
should  be  the  amount  of  the  check? 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

The  business  of  Fred  Miller  has  now  developed  to  a  point  where  he  feels  he 
requires  assistance  in  its  administration.   An  arrangement  is  made  with  his 
brother,  August  Miller,  to  invest  $15,000  and  become  sales  manager.   Fred 
Miller  is  to  contribute  additional  cash  to  bring  his  capital  up  to  that  of 
August  Miller.   The  partnership  agreement,  inter  alia,  provides  that: 

1.  Name  of  the  new  firm  shall  be — MILLER  BROTHERS. 

2.  Scope  of  business — purchase  and  sale  of  automobiles  and  accessories 

and  supplies. 

3.  Place  of  business — Chicago,  111, 

4.  Assets  and  liabilities  of  Fred  Miller  to  be  taken  over  by  the  new 

firm  at  the  book  balances  of  February  28,  19 — . 

5.  No  interest  to  be  allowed  on  capital  accounts. 

6.  Profits  and  losses  to  be  divided  as  follows: 

Fred  Miller   66  2/3% 
August  Miller  33  1/3% 
Y.  Partnership  agreement  to  become  effective  on  and  after  March  1, 
19— . 
You  are  required  to: 

(a)  Prepare  but  not  post  entries  to  close  the  books  of  Fred  Miller  as 

of  February  28,  19 — . 

(b)  Prepare  but  not  post  the  entries  to  open  the  books  of  MILLER 

BROTHERS,  the  new  partnership. 

Solution  to  Assignment  1-5-2 


FINANCIAL  STATEMENTS  OF  FRED  MILLER,  FEBRUARY  28,  19— 

FRED  MILLER 
BALANCE  SHEET,  FEBRUARY  28,  19— 


ASSETS 
CAPITAL  ASSETS: 
Warehouse  and 

Office  Fix.    %   1,250.00 
Auto  Del.  Truck    1,750.00  %   3,000.00 


CURRENT  ASSETS: 
Merchandise  In- 
ventory      $10,890.00 
Customers*  Ac- 
counts 642.50 
Cash             1.183.52  12,716.02 


Total 


$15,716.02 


LIABILiriES 
CAPITAL  ACCOUNT: 
Balance,  February  1 
Add — Profits  for 

February  (Exhibit  B) 


Deduct — Drawings 

Balance,  February  28 
CURRENT  LIABILITIES: 
Accounts  Payable 

Total 


Exhibit  A 

$11,289.30 

1.401.72 

$12,691.02 
425.00 

$12,266.02 

3,450.00 

$15,716.02 


Copyright,  1917.  The  Ronald  Press  Company 


1-6-4 
Exhibit  B 


FRED  MILLER 
STATEMENT  OF  PROFIT  AND  LOSS 
MONTH  ENDING  FEBRUARY  28,  19— 

TRADING  ACCOUNT 


Inventory,  February 

1,  19—  $  2,197.50 

Purchases        $11,963.60 


Deduct — Returns 

Balance — Gross 
Profit  from 
Sales  carried 
down 


75.00  11,888.60 


1,872.15 


$15,958.25 


Gross  Sales    $5,200.75 

Deduct — Allow- 
ances and 
Returns         132.50  $5,068.25 


Inventory,  February  28, 
19— 


10,890.00 


$15,958.25 


PROFIT  AND  LOSS  ACCOUNT 


Salaries 
Rent 

General  Expense 
Stationery  and  Supplies 
Balance — Net  Profit  from 
Operations  carried  down 


Discount  on  Sales 
Balance — Surplus  Net  Profit 
carried  to  Drawing  Account 


$  440.50 

Gross  Profit  from  Sales 

50.00 

brought  down 

76.55 

53.75 

1,251.35 

$1,872.15 

$   39.89 

Net  Profit  from  Opera- 

tions brought  down 

1,401.72 

Discounts  on  Purchases 

Interest  Received 

$1,441.61 

$1,872.15 


JOURNAL  ENTRIES  NECESSARY  TO  CLOSE  THE  BOOKS 
OF  FRED  MILLER,  FEBRUARY  28,  19— 


(1) 
Merchandise 

To — Inventory  of  Merchandise 
To  transfer  inventory  February  1,  19 — , 

(2) 
Inventory  of  Merchandise 
To — Merchandise 
To  set  up  inventory  February  28,  19 — . 


$2,197.50 


10,890.00 


$1,872.15 


$1,251.35 

189.77 

.49 

$1,441.61 


$2,197.50 


10,890.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-6-5 


(3) 


Merchandise 

Discounts  on  Purchases 

Interest 

To — Profit  and  Loss 
To  close  out  income  accounts. 

Profit  and  Loss 
To — Salaries 
Rent 

General  Expense 
Stationery  and  Supplies 
Discount  on  Sales 
To  close  out  expense  accounts. 


(4) 


(5) 


$1,872.15 

189.77 

.49 


660.69 


Profit  and  Loss 

To — Fred  Miller — Drawing  account 
To  close  surplus  net  profit  into  Drawing  account. 

(6) 
Fred  Miller — Drawing  Account 

To — Fred  Miller — Capital  Account 
To  transfer  balance  of  Drawing  account. 


1,401.72 


976.72 


$2,062.41 


440.50 
50.00 
76.55 
53.75 
39.89 


1,401.72 


976.72 


ANSWERS  TO  QUESTIONS 

Answer  to  Question  8 — A  system  of  internal  check  is  a  method  of  doing 
business  whereby  routine  work  is  performed  at  least  cost  and  in  such  manner 
that  collusion  between  two  or  more  persons  must  be  involved  before  error  or 
fraud  can  remain  undetected  in  the  accounts  and  records.   The  character  of  the 
system  will  of  course  depend  on  the  nature  of  the  business,  its  size,  and 
personnel.   It  involves  the  methods  in  use  for  handling  cash,  petty  cash, 
sales,  return  sales,  purchases,  return  purchases,  stock,  wages,  ledgers,  etc. 

The  elements  of  a  good  system  of  internal  check  will  be  found  in  Mont- 
gomery's Auditing,  Second  Edition,  pages  53-58. 

Answer  to  Question  9 — Entries  on  A  B  Go's  books: 

-September  3,  1916- 
Purchases  (or  Merchandise  account)  $3,450.00 

To— C  D  Co.  $3,450.00 

To  record  purchases  as  per  their  invoice  dated 
September  2,  1916,  terms  2/10,  n/30. 

-5- 
C  D  Co.  306.00 

To — Purchases  (or  Return  Purchases)  306.00 

To  record  merchandise  returned  as  per  our  let- 
ter dated  today,  and  their  credit  memorandum 
received  September  8,  #43560. 


Copyright,  1917,  The  Ronald  Press  Compar- 


1-6-6 
-16- 
C  D  Co,  $1,670.00 

To — Sales  $1,670.00 

To  record  sales  as  per  our  invoice  #A6715  dated 
today. 

-20- 

Allowaiices  on  Sales  (or  Sales)  320.00 

To — C  D  Co.  320.00 

To  record  allowance  as  per  our  credit  memorandum 
#3742  made  today. 

-25- 

C  D  Co.  2,000.00 

To— Cash  2,000.00 

Check  #57641.   (This  entry  would  be  made  in  the 
cash  book. ) 

Answer  to  Question  10 — The  fact  that  the  total  debits  equal  the  total 
credits  does  not  prove  conclusively  that  the  ledger  is  in  balance.   There  may 
be  an  offsetting  error  in  the  postings,  in  abstracting  ledger  balances,  in 
footing  the  ledger,  in  taking  off  the  trial  balance,  or  even  in  footing  the 
trial  balance.   Such  instances  are  not  frequent,  however. 

It  would  not  be  safe  to  write  off  a  small  difference.   The  small  differ- 
ence may  be  caused  by  two  or  more  large  discrepancies,  one  a  debit  and  the 
other  a  credit. 

Answer  to  Question  11 — In  closing  a  cash  book  the  balance  on  hand  and  in 
bank  at  the  end  of  the  month  should  be  shown  on  the  disbursement  side  of  the 
current  month.   On  the  first  of  next  month  the  balance  should  be  brought  down 
on  the  cash  receipts  side. 

The  total  cash  receipts  and  disbursements  are  posted  monthly  to  the  debit 
and  credit  respectively  of  the  cash  account  in  the  ledger.   Hence,  the  balance 
at  the  end  of  the  month  in  that  account  should  agree  with  the  amount  called 
for  by  the  cash  book.   It  will  be  seen  that  the  cash  account  in  the  ledger  is 
supported  by  the  detailed  record  of  cash  receipts  and  disbursements  in  the 
cash  book. 

The  cash  account  in  the  general  ledger  serves  as  a  controlling  account  for 
cash.   Its  presence  is  especially  desirable  where  there  is  more  than  one  cash 
book  in  order  that  the  summaries  of  receipts  and  disbursements  may  be  plainly 
shown. 

Answer  to  Question  12 — The  function  of  a  ledger  is  to  collect  in  the  form 
of  accounts  the  detailed  operations  appearing  in  the  various  books  of  original 
entry.   The  accounts  may  be  elaborated  to  any  extent  desired  in  order  that  the 
required  information  may  be  properly  presented. 

Copyright,  1917,  The  Ronald  Press  Company 


1-6-7 

PARTNERSHIPS 

DEFINITION— A  PARTNERSHIP  or  FIRM  is  the  relationship  existing  between  two 
or  more  persons  who  combine  their  property,  credit,  and  services  for  the  pur- 
pose of  conducting  a  business  for  mutual  profit. 

KINDS  OF  PARTNERSHIPS— The  ordinary  partnership  is  the  GENERAL  UNLIMITED 
PARTNERSHIP,  that  is,  one  engaged  in  some  general  line  of  business  and  un- 
limited as  to  the  liability  of  its  members  to  creditors. 

A  SPECIAL  PARTNERSHIP  is  a  partnership  in  some  particular  enterprise, 
usually  limited  to  certain  specified  transactions.   An  example  is  the  JOINT 
ADVENTURE  (see  I-lO-l). 

A  LIMITED  PARTNERSHIP  is  a  partnership  in  which  one  or  more  members  have  a 
limited  liability  to  creditors,  usually  confined  to  the  amount  of  their  sub- 
scription or  investment.   Such  partners  are  called  SPECIAL  PARTNERS.   There 
must  be  at  least  one  member  who  is  a  GENERAL  PARTNER — one  whose  liability  to 
creditors  is  not  limited. 

Partnerships  are  also  classified  as  TRADING  and  NON- TRADING  PARTNERSHIPS, 
the  latter  consisting  of  professional  firms  (lawyers,  accountants,  etc.)  and 
other  firms  who  render  services  rather  than  buy  and  sell  merchandise. 

ARTICLES  OF  PARTNERSHIP — No  written  agreement  need  be  made  to  establish  a 
partnership.   However,  it  is  usual  to  draw  up  "articles  of  partnership"  upon 
its  formation,  and  to  state,  inter  alia: 

1.  Names  of  partners. 

2.  Name  of  partnership. 

3.  Scope  of  business ;  place  of  business. 

4.  Date  partnership  commences  ;  duration. 

5.  Contributions  of  each  partner,  whether  property  or  merely  use  of 

property. 

6.  Interest  allowed  on  investment ;  how  computed. 

7.  Basis  of  sharing  profits  and  losses. 

8.  Duties  of  partners  and  salaries  allowed. 

9.  Drawings  of  partners  and  interest  charged  thereon. 

10.  Books  of  account;  audit. 

11.  Dissolution  of  partnership;  shares  in  good-will,  etc. 

METHODS  OF  DISTRIBUTING  PROFITS— 

1.  Equally,  in  the  absence  of  any  provision  in  the  articles  of  partner- 

ship. 

2.  On  £imount  of  capital: 

(a)  At  beginning  of  fiscal  period. 

(b)  At  end  of  fiscal  period. 

(c)  Average  investment  during  period. 

3.  Arbitrary  percentages. 

4.  In  event  of  liquidation  the  same  basis  of  profit-sharing  prevails  as 

in  a  going  concern,  unless  provision  to  the  contrary  is  found  in  the 
articles  of  partnership. 

Copyright,  1917,  The  Ronald  Press  Company 


1-6-8 

CAPITAL  ACCOUNTS  WITH  PARTNERS— In  a  partnership  an  account  should  be  kept 
for  the  capital  investment  of  each  partner,  known  as  his  capital  account.   As 
a  rule  each  partner  LOSES  INDIVIDUAL  OWNERSHIP  of  any  asset  which  he  invests 
in  the  business  conducted  by  the  partnership  and  receives  an  undivided  inter- 
est in  all  the  assets  of  the  business  ;  and  any  profits  derived  from  it  are 
likewise  the  profits  of  the  business  rather  than  of  the  individual. 

The  interest  of  a  partner  in  the  capital  of  the  partnership  is  his  origi- 
nal investment  and  the  increases  or  decreases  therein  arising  from  his  propor- 
tion of  subsequent  profits  or  losses.   To  his  interest  is  added,  of  course, 
additional  funds  invested,  while  withdrawals  are  deducted. 

Distinction  should  be  made  here  between  interest  in  the  capital  of  the 
partnership  and  interest  in  the  profits  and  losses.   The  proportion  need  not 
be  the  same  in  both  cases. 

DRAWING  ACCOUNTS  WITH  PARTNERS — The  amount  a  partner  may  withdraw  depends 
on  the  articles  of  partnership.   If  there  is  no  provision  in  regard  to  this 
he  can  withdraw  his  profits  only  by  the  consent  of  the  remaining  partners. 
A  separate  account  is  usually  kept.   As  in  a  single  proprietorship,  the  net 
profit  for  a  period  is  carried  to  the  drawing  accounts,  and  the  balance  of  the 
drawing  accounts  transferred  to  the  capital  accoiints.   Interest  allowed  on 
capital  investment  is  also  credited  to  drawing  accounts. 

CLOSING  PROFIT  AND  LOSS  ACCOUNT  INTO  DRAWING  ACCOUNTS 

Having  closed  all  the  nominal  accounts  into  the  Profit  and  Loss  account  at 
the  end  of  a  fiscal  period,  the  final  step  remains  to  show  the  distribution  of 
the  profits  as  between  partners.   The  surplus  net  profit  may  be  brought  do\7n 
and  distributed  in  the  following  manner: 


Salaries 

Stationery  and  Supplies 

Rent 

Light  and  Heat 

General  Expense 

Net  Profit  carried  down 


PROFIT  AND  LOSS  ACCOUNT 
$4,000.00   Gross  Profit  from  Trading 
360.00     Account 
300.00 
670.00 
470.00 
2,860.00 


$8,660.00 

Interest  on  Capital  Accounts: 
Accounts: 

Brown  $750.00 

White  870.00  $1,620.00 


Division  of  remainder 
of  profits 
Brown — %  $620.00 

White--)^  620.00 


1,240.00 


$2,860.00 


1,660.00 


Net  profit  brought  down 


1,660.00 


:,860.00 


$2,860.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-6-9 
The  journal  entries  required  to  close  the  second  section  of  the  preceding 
account  would  appear  as  follows: 

(1) 

Profit  and  Loss  $1,620.00 

To — Brown — Drawing  Account  $750,00 

White — Drawing  Account  870.00 

To  credit  partners'  accounts  with  interest  as  follows: 

Brown — 6%  on  balance  of  Capital  account  at  beginning 

of  year  ($12,500.00)  $750.00 

White — 6%  on  balance  of  Capital  account  at  beginning 

of  year  ($14,500.00)  $870.00 

(2) 

Profit  and  Loss  1,240.00 

To — Brown — Drawing  Account  620.00 

White — Drawing  Account  620.00 

To  credit  partners'  accounts  with  remainder  of  profits, 
one-half  to  each. 

Brown's  drawing  account  would  appear  as  follows,  after  giving  effect  to 
the  above  entries: 

BROWN— DRAWING  ACCOUNT 
Drawing  during  year  (already  Interest  on  Capital  invested  $750.00 

in  account)  $1,000.00   One-half  balance  of  Profits    620.00 

Balance — Transferred  to 

Capital  Account  370.00  / 


$1,370.00         '  $1,370.00 


REFERENCES : 

Bays,  The  Law  of  Partnership  (American  Commercial  Law  series,  Vol.  IV) 

Esquerre,  Chapter  I 

Oilman  Chapter  IX 

Greendlinger  and  Schulze,  Chapters  XV  and  XVI 

Hatfield,  Chapter  XVII 


Copyright,  1917,  The  Ronald  Press  Company 


1-7-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  7 

EXPANSION  OF  BOOKKEEPING  RECORDS 


Problem  5 

Stone  and  Madison  form  a  partnership  with  a  main  office  in  Chicago  and  a 
branch  in  Evanston.   On  July  31,  1917,  the  following  trial  balance  was  ab- 
stracted from  the  books  of  the  Chicago  office: 


ACCOUNT 
Land  and  Buildings 
Office  Fixtures 

Merchandise  Inventory,  July  31,  1917 
Accounts  Receivable 
Evanston  Office 
Cash 

A.  Stone — Capital  Account 

B.  Madison — Capital  Account 
Accounts  Payable 

Profit  and  Loss 


DEBIT 
$12,000.00 

1,500.00 
12,500.00 
10,100.00 

4,500.00 

8,900.00 


CREDIT 


$20,000.00 

15,000.00 

8,500.00 

6,000.00 


$49,500.00  $49,500.00 


A  trial  balance  was  also  prepared  from  the  books  of  the  Evanston  branch: 


Office  Fixtures 

MerchEindise  Inventory,  July  31,  1917 

Accounts  Receivable 

Cash 

Chicago  Office 

Accounts  Payable 

Profit  and  Loss 


$500.00 
4,500.00 
6,000.00 
1,500.00 

$4,000.00 
5,000.00 
3,500.00 

$12,500.00  $12,500.00 


The  discrepancy  of  $500  between  the  Evanston  office  account  and  the 
Chicago  office  account  is  explained  by  the  fact  that  merchandise  amounting  to 
this  sum  was  shipped  by  the  Chicago  office  to  the  Evanston  branch,  being  re- 
ceived by  the  latter  on  July  31,  1917,  but  not  yet  recorded  by  them  either  in 
the  Inventory  or  in  the  Chicago  office  account. 

Prepare  journal  entries  necessary  to  close  the  books  of  both  main  office 
and  branch  for  the  year,  assuming  each  partner  to  be  entitled  to  one-half  the 
net  profits.  Draw  up  a  balance  sheet  showing  the  financial  position  of  main 
office  and  branch  together. 


Copyright,  1917,  The  Ronald  Press  Company 


1-7-2 

MISCELLANEOUS  QUESTIONS 
Question  18 — 

(a)  Illustrate  a  method  of  ruling  the  cash  book  of  Miller  Bros,  at  the  end 
of  each  month  which  will  indicate  clearly  the  accounts  to  which  totals  of 
columns  are  to  be  posted  and  the  correctness  of  the  cross  footings. 

(b)  Do  you  consider  it  desirable  or  necessary  to  make  a  journal  entry  in 
the  general  journal  summarizing  the  cash  book  totals? 

Question  19 — Explain  how  equal  debits  and  credits  are  maintained  in  the 
cash  disbursements  book  which  Miller  Bros,  will  keep,  and  show  also  the  nature 
of  postings  which  will  be  made  therefrom. 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 
The  following  schedule  of  accounts  will  be  used  by  the  new  firm  of  Miller 
Bros.   The  accounts  should  be  opened  in  the  order  indicated.  New  forms  to  be 
used  are:  (1)  journal  (Form  3);  (2)  cash  (Form  10). 

MILLER  BROS. 
SCHEDULE  OF  ACCOUNTS 


GENERAL  LEDGER 


101  Warehouse  and  Office  Equipment  801 

121  Delivery  Equipment  802 

151  Good-Will  803 

201  Miller  Motor  Car  Co.  Common  Stock  804 

202  Miller  Motor  Car  Co.  Preferred  811 

Stock  812 

301  Inventory  of  Merchandise  813 

302  Inventory  of  Miscellaneous  Suppl.  814 

303  Consignment  Stock  Outward  841 

304  Advances  on  Consignments- Inward  842 
321  Customers  Ledger  851 

331  Notes  Receivable  861 

332  Interest  Accrued  on  Notes  Re-  362 

ceivable  881 

341  Cash  in  Bank  891 

342  Petty  Cash  Fund  901 

401  Unexpired  Insurance  902 

402  Rent  Paid  in  Advance  911 

403  Interest  Prepaid  912 
501  Creditors  Ledger  915 
511  Notes  Payable  951 
521  Bank  Loan  952 
551  Notes  Receivable  Discounted  953 
561  Miller  Motor  Car  Co.,  Vendee  954 

601  Taxes  Accrued  955 

602  Interest  Accrued  on  Notes  Payable  961 

701  Fred  Miller — Capital  Account  962 

702  August  Miller — Capital  Account  963 

711  Fred  Miller — Drawing  Account  964 

712  August  Miller — Drawing  Account  965 
751  Profit  and  Loss  981 

982  Discounts 


Auto  Sales 
Auto  Freight -Out 
Auto  Return  Sales 
Auto  Rebates  and  Allowances 
A  &  S  Sales 
A  &  S  Freight-Out 
A  &  S  Return  Sales 
A  &  S  Rebates  and  Allowances 
Auto  Trading 
A  &  S  Trading 

Sales  of  Consignments-Outward 
Earnings  on  Consignments-Inward 
Profits  on  Consignments-Outward 
Discount  on  Purchases 
Interest  Received 
Auto  Purchases 
Auto  Freight -In 
A  &  S  Purchases 
A  &  S  Freight-In 
A  &  S  Return  Purchases 
Rent 
Taxes 
Insurance 

Office  Salaries  and  Expense 
General  Expense 
Delivery  Expense 
Advertising 

Salesmen's  Salaries  and  Commissions 
Salesmen's  Traveling  Expenses 
Miscellaneous  Selling  Expenses 
Interest  Paid 
on  Sales 


Copyright,  1917,  The  Ronald  Press  Company 


1-7-3 

CUSTOMERS  LEDGER  CREDITORS  LEDGER 

E.  T.  Adams  Chicago  Furniture  Co. 

Barnhart  and  Co.  New  York  Auto  Supply  Co. 

Cash  Sales  Well-Built  Auto  Co. 

C.  0.  D.  Sales  Wilson  Manufacturing  Co. 

James  Garage  Co. 
W.  F.  Newton 
Frank  Rice 
George  Wilson 

Accounts  701-712  should  be  on  two-account  pages,  account  751  on  a  one- 
account  page,  and  the  remaining  accounts  on  three-account  pages. 


SUMMARY  OF  TRANSACTIONS 

MARCH  1 
Post  the  entries  necessary  to  open  the  books  of  Miller  Bros.   Received  20 
automobiles  from  the  Well-Built  Auto  Co.,  invoice  No.  7866,  terms  2%  cash  in 
five  days,  $30,000. 

MARCH  2 
Sale  to  E.T.  Adams  of  two  automobiles  for  $2,000  each,  terms  30  days. 

MARCH  3 
Paid  Chicago  Furniture  Co.'s  bill  of  $500,  being  allowed  a  2%  discount 
thereon.   Paid  freight  of  $500  on  purchase  of  automobiles  from  Well-Built  Auto 
Co.  on  March  1. 

MARCH  4 
Additional  storage  facilities  were  rented  for  the  six  months  ending  August 
31,  19 — ,  from  National  Storage  Co.,  for  $300  which  was  paid  at  once.   (Charge 
Rent  Paid  in  Advance  account.)   Sale  to  George  Wilson  of  auto  supplies, 
amounting  to  $8,000,  terms  2%  cash  in  5  days. 

MARCH  5 
Received  $196  cash  from  Barnhart  &  Co.  in  full  of  account,  they  having  de- 
ducted $4  discount  from  their  bill,  which  we  allow.   Paid  salesman's  salary 
amounting  to  $90  for  month  of  March. 

MARCH  6 
Paid  salary  of  bookkeeper  $60  (charge  to  Office  Expenses).  Purchased  from 
Wilson  Manufacturing  Co.  auto  supplies,  $12,580,  invoice  No.  678,  terms  1%   10 
days,  net  60  days.  Paid  for  hay  and  grain  purchased  from  Marks  Grain  Co., 
$253  (charge  Delivery  Expenses). 

MARCH  7 
Sale  to  Frank  Rice  of  8  autos,  $18,000,  terms  1%  cash  10  days,  net  60 
days.   Received  from  E.  T.  Adams  4  Co.  $212.50  to  apply  on  account. 

Copyright,  1917,  The  Ronald  Press  Company 


1-7-4 
Solution  to  Assignment  1-6-3 

ENTRIES  ON  THE  BOOKS  OF  FRED  MILLER  TO  RECORD  THE  TRANSFER  OF  ASSETS  AND  LIA- 
BILITIES TO  THE  FIRM  OF  MILLER  BROS. 

(1) 
Miller  Bros.,  Vendee  $15,716.02 

To — Warehouse  and  Office  Fixtures  $  1,250.00 

Auto  Delivery  Truck  1,750.00 

Cash  1,183.52 

Merchandise  Inventory  10,890.00 

E.  T.  Adams  212.50 

Barnhart  &  Co.  200.00 

Geo.  Wilson  230.00 

To  record  the  transfer  of  assets  of  Fred 
Miller  to  Miller  Bros. 


(2) 
Chicago  Furniture  Co.  500.00 

New  York  Auto  Supply  Co.  1,350.00 

Wilson  Manufacturing  Co.  1,600.00 

To — Miller  Bros.,  Vendee  3,450-00 

To  record  the  transfer  of  liabilities  of 
Fred  Miller  to  Miller  Bros. 


(3) 
Fred  Miller — Capital  Account  12,266.02 

To — Miller  Bros.,  Vendee  12,266.02 

To  record  the  transfer  of  Fred  Miller's 
capital  account  to  Miller  Bros. 


ENTRIES  ON  THE  BOOKS  OF  MILLER  BROS.  TO  RECORD  THE  RECEIPT  OF  ASSETS  AND  AS- 
SUMPTION OF  LIABILITIES  TURNED  OVER  TO  THE  FIRM  BY  FRED  MILLER 

(1) 

Warehouse  and  Office  Fixtures  .      $  1,250.00 

Auto  Delivery  Truck  1,750.00 

Cash  1,183.52 

Merchandise  Inventory  10,890.00 

E.  T.  Adams  212.50 

Barnhart  &  Co.  200.00 

Geo.  Wilson  230.00 

To — Fred  Miller — Capital  Account  !|15,716.02 

To  record  on  the  books  of  Miller  Bros. ,  the 

assets  turned  over  to  the  firm  by  Fred 

Miller. 

Copyright,  1917,  The  Ronald  Press  Company 


1-7-5 


(2) 
Fred  Miller — Capital  Account  $  3,450.00 

To — Chicago  Furniture  Co. 

New  York  Auto  Supply  Co. 
Wilson  Manufacturing  Co. 
To  record  on  the  books  of  Miller  Bros.,  the 
liabilities  assumed  on  behalf  of  Fred  Miller. 


500.00 
1,350.00 
1,600.00 


(3) 
Cash 

To — Fred  Miller — Capital  Account 
To  record  cash  contributed  by  Fred  Miller  to 
bring  his  investment  up  to  $15,000  as  per 
agreement. 


2,733.98 


2,733.98 


(4) 
Cash 

To — August  Miller — Capital  Account 
To  record  cash  paid  in  as  per  partnership 
agreement. 


15,000.00 


15,000.00 


Entries  (3)  and  (4)  will  appear  in  the  cash  book. 


Solution  to  Problem  2 


Exhibit  A 


H.  A.  WALTERS 
BALANCE  SHEET,  OCTOBER  31,  1917 


ASSETS 
CAPITAL  ASSETS: 
Land 
Buildings 
Store  Fixtures 
Delivery  Equip- 
ment 
Bond  Investment 

CURRENT  ASSETS: 

Inventory  of 
Mdse. 

Inventory  Sup- 
plies 

Accounts  Re- 
ceivable 

Notes  Receivable 

Cash 


$  3,000.00 

10,000.00 

4,000.00 

500.00 
11,000.00  $28,500.00 


$15,480.00 

400.00 

18,640.00 
1,800.00 
3,240.00 


39,560.00 


$68,060.00 


LIABILITIES 
CAPITAL  ACCOUNT: 

Balance,  November  1, 

1916 
Profits  for  year  (per 
Exhibit  B) 


Deduct — Drawings 

Balance,  October  31, 
1917 

MORTGAGE  PAYABLE 

CURRENT  LIABILITIES: 
Accounts  Payable 


$40,000.00 

11,516.00 

$51,516.00 

1,302.00 

$50,214.00 
5,000.00 

12,846.00 
$68,060.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-7-6 
Exhibit  B 


H.  A.  WALTERS 

STATEMENT  OF  PROFITS  AND  INCOME 

YEAR  ENDING  OCTOBER  31,1917 


GROSS  SALES 

Deduct — Return  Sales 

NET  SALES 
DEDUCT— COST  OF  SALES: 

Inventory,  November  1,  1916 

Purchases 

Add — Freight  thereon 


Deduct — Returns  and  Allowances 

Cost  of  Goods  Handled 
Deduct — Inventory,  October  31,  1917 

GROSS  PROFIT  ON  SALES 

DEDUCT— SELLING  AND  GENERAL  EXPENSE: 
Selling  Expense: 

Sales  Clerks*  Salaries 
Advertising  Expenses 
Delivery  Expenses 
Selling  Expenses 

General  Expense: 
Office  Expense 
General  Expense 

NET  PROFIT  FROM  OPERATIONS 

ADD— OTHER  INCOME: 

Income  from  Bond  Investments 
Rent  Received 
Interest  Received 


DEDUCT— Interest  Paid 

Discounts  on  Sales 

SURPLUS  NET  PROFIT  (per  Exhibit  A) 


$42,800.00 
1,200.00 

$44,000.00 
5,400.00 


$64,020.00 
2,982.00 


$  9,462.00 


38,600.00 

$48,062.00 
15,480.00 


$61,038.00 


32,582.00 

$28,456.00 


$5,800.00 

1,600.00 

1,140.00 

3,200.00 

$11,740.00 

$2,900.00 

3,410.00 

6,310.00 

18,050.00 

$10,406.00 

$420.00 

760.00 

910.00 

2,090.00 

$12,496.00 

$300.00 

680.00 

980.00 

$11,516.00 

Copyright,  1917,  The  Ronald  Press  Company 


1-7-7 


ENTRIES  TO  CLOSE  BOOKS  OF  H.  A.  WALTERS  ON  OCTOBER  31,  1917 

(1) 


Merchandise  $  9,462.00 

To — Inventory  of  Merchandise 
To  close  out  opening  inventory  at  Nov.  1,  1916. 

(2) 
Inventory  of  Merchandise,  October  31,  1917       15,480.00 
To — Merchandise 
To  set  up  closing  inventory  at  Oct.  31,  1917. 

(3) 
Delivery  Expense  Supplies  Inventory  160.00 

To — Delivery  Expenses 
To  set  up  delivery  supplies  not  used  at  Octo- 
ber 31,  1917. 

(4) 
General  Expense  Supplies  Inventory  240.00 

To — General  Expenses 
To  set  up  general  expense  supplies  not  consumed. 


(5) 


(6) 


Merch£indise 

Income  on  Bond  Investments 
Rent  Received  and  Accrued 
Interest  Received 

To — Profit  and  Loss 
To  close  out  income  accounts. 

Profit  and  Loss 

To — Sales  Clerks'  Salaries 
Selling  Expenses 
Advertising  Expenses 
Delivery  Expenses 
Office  Expenses 
General  Expenses 
Interest  Paid 
Merchandise  Discounts 
To  close  out  expense  accounts. 


(7) 
Profit  and  Loss 

To — H.  A.  Walters — Drawing  Account 
To  close  net  profit  into  Drawing  Account. 

(8) 
H.  A.  Walters — Drawing  Account 

To — H.  A.  Walters — Capital  Account 
To  close  balance  of  Drawing  account  into 
Capital  account. 


28,456.00 
420.00 
760.00 
910.00 


19,030.00 


11,516.00 


10,214.00 


$9,462.00 


15,480.00 


160.00 


240.00 


30,546.00 


5,800.00 
3,200.00 
1,600.00 
1,140.00 
2,900.00 
3,410.00 
300.00 
680.00 


11,516.00 


10,214.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-7-8 
EXPANSION  OF  BOOKKEEPING  RECORDS 
The  larger  a  business  the  more  detailed  the  information  required  from  the 
books  of  account  ;  this  necessitates  a  larger  force  of  bookkeepers  and  a  divi- 
sion of  the  books  so  that  all  may  work  on  them.  It  then  becomes  desirable  to 
install  some  check  other  than  a  general  trial  balance  against  the  postings  of 
the  ledger-keepers,  and  this  has  given  rise  to  CONTROLLING  ACCOUNTS.  Another 
device  common  in  most  systems  of  accounts  is  the  COLUMNAR  JOURNAL,  whose  pur- 
pose is  to  lessen  the  number  of  postings  from  journal  to  ledger. 

CONTROLLING  ACCOUNTS 
DEFINITION — A  CONTROLLING  ACCOUNT  is  a  general  ledger  account  to  which  are 
posted  totals  of  items  that  have  been  posted  individually  to  subsidiary  ac- 
counts carried  in  a  SUBSIDIARY  LEDGER. 

KINDS  OF  CONTROLLING  ACCOUNTS — Controlling  accounts  are  usually  provided 
for  all  the  ledgers  except  the  general  ledger,  such  as: 

1.  Customers  Ledger 

2.  Creditors  Ledger 

3.  Private  Ledger 

4.  Expense  Ledgers 

5.  Plant  and  Equipment  Ledger,  etc. 

A  subsidiary  ledger  with  its  controlling  account  may  be  provided  for  any 
class  of  transactions  so  numerous  that  a  substantial  share  of  the  time  of  one 
or  more  clerks  is  required  to  keep  it,  or  for  one  or  more  accounts  regarded  as 
confidential. 

OPERATION  OF  CONTROLLING  ACCOUNTS — The  following  skeleton  ledger  account 
illustrates  the  nature  of  postings  to  the  customers  ledger  controlling  ac- 
count : 

CUSTOMERS  LEDGER  CONTROLLING  ACCOUNT 
DEBITS  CREDITS 

Total  of  opening  balances  Cash 

Sales  carried  on  subsidiary  ledger     Discounts 

Protested  or  returned  checks.         Returns  and  allowances 
notes,  etc.  Notes  and  acceptances 

Other  cash  debits  Accounts  written  off 

Interest  Other  journal  credits 

Other  journal  debits 

The  balance  of  this  account  will  be  a  debit  and  should  equal  the  total  of  the 
balances  of  the  accounts  in  the  customers  ledger. 

The  first  debit  is  the  balance  of  the  account  brought  down  from  the  pre- 
vious period.   The  second  comes  from  the  total  of  sales  recorded  in  the  sales 
book,  the  details  making  up  the  total  sales  having  been  posted  to  accounts  in 
the  customers  ledger.   The  third  and  fourth  debits  come  from  the  cash  dis- 
bursements book  and  may  be  the  total  of  a  special  column  provided  for  that 
purpose;  or  if  no  special  column  has  been  provided,  each  item  falling  under 
this  head  must  be  POSTED  TWICE  from  the  cash  disbursements  book:  first  to  the 
debit  of  the  customer's  account,  and  second  to  the  debit  of  the  customers 
ledger  controlling  account.   The  fifth  and  sixth  debits  come  from  a  total  of  a 
special  column  in  the  general  journal. 

Copyright,  1917,  The  Ronald  Press  Company 


1-7-9 

The  first  and  second  credits  are  posted  from  the  total  of  a  special  column 
in  the  cash  receipts  book,  while  the  remaining  credits  come  from  t"he  total  of 
a  special  column  in  the  general  journal. 

It  will  be  seen  from  the  preceding  outline  that  the  totals  of  special  col- 
umns in  books  of  original  entry  compose  the  various  debits  and  credits  appear- 
ing in  the  controlling  account.  In  case  no  special  column  appears  in  a  book  of 
original  entry,  an  item  posted  as  a  debit  or  credit  to  an  account  in  a  subsid- 
iary ledger  must  be  posted  as  a  debit  or  credit,  respectively,  to  the  subsid- 
iary ledger's  controlling  account.   The  subsidiary  ledger  is,  therefore,  in  a 
certain  sense  but  a  detailed  memorandum  record  of  a  ledger  account,  and  ALL 
items  posted  to  one  must  be  posted,  individually  or  in  total,  to  the  other. 

Customers  ledgers  may  be  divided  into  several  groups  with  as  many  control- 
ling accounts;  likewise  expense  ledgers,  etc. 

A  list  of  balances  drawn  from  a  subsidiary  ledger  is  called  a  "trial  bal- 
ance," but  it  differs  from  the  one  previously  described.   The  latter  ascer- 
tains whether  the  total  debit  balances  equal  the  total  credit  balances,  while 
the  former  usually  consists  entirely  of  debits  or  entirely  of  credits  the 
total  of  which  must  equal  the  debit  or  credit  balance  of  controlling  account. 

THE  PRIVATE  LEDGER — The  operation  of  controlling  accounts  and  subsidiary 
ledgers  for  customers,  creditors,  expenses,  plant  and  equipment,  and  other 
asset  accounts  is  much  alike.  The  handling  of  a  private  ledger  is  somewhat 
different.   A  PRIVATE  LEDGER  is  a  ledger  containing  information  considered 
confidential  and  is  therefore  usually  kept  by  an  officer  or  trusted  employee. 
This  information  may  consist  of  partners*  capital  and  drawing  accounts,  offi- 
cers* salaries,  merchandise  inventory,  capital  asset  accounts,  certain  lia- 
bilities, etc. 

In  connection  with  a  private  ledger  it  is  usual  to  find  a  PRIVATE  JOURNAL. 
The  source  of  entries  in  the  private  journal  is  the  transactions  affecting  the 
private  ledger  account.   As  soon  as  the  private  journal  is  introduced  it  is 
customary  to  find  an  account  in  the  private  ledger  called  "General  Ledger 
Account"  which,  if  the  private  ledger  account  in  the  general  ledger  is  a 
credit,  will  appear  as  a  debit  and  be  equal  in  amount;  and  vice  versa.   Before 
preparing  financial  statements  the  trial  balance  of  both  ledgers  will  be  com- 
bined, omitting  the  private  ledger  account  and  the  general  ledger  account. 

COLUMNAR  JOURNALS 
DEFINITION— A  COLUMNAR  JOURNAL  is  a  book  of  original  entry  in  which  col- 
umns have  been  introduced  for  the  purpose  of  classifying  the  treinsactions  and 
thus  lessening  the  number  of  postings. 

KINDS  OF  COLUMNAR  JOURNALS — There  are  many  varieties  of  columnar  journals: 

1.  Cash  Receipts  Book 

2.  Cash  Disbursements  Book 

3.  Sales  Book 

4.  Purchase  Book 

5.  Notes  Receivable  Register 

6.  Notes  Payable  Register 

7.  Insurance  Register 

8.  Account  Sales  Register 

9.  Voucher  Register 

10.  General  Journal,  etc. 

Copyright,  1917,  The  Ronald  Press  Company 


1-7-10 

OPERATION  OF  COLUMNAR  JOURNALS — All  columnar  journals  must  conform  to  the 
principle  of  an  equal  debit  and  credit  for  each  entry.  With  this  in  mind  a 
few  transactions  may  be  traced  through,  using  as  models  the  journals  of  Miller 
Bros. : 

DEBIT 
1.  Customer  pays  cash  on   To  cash;  will  be  included 

with  other  items  under 

"Bank  Deposits"  as 

soon  as  deposit  is 

made  ;  total  cash  re- 
ceipts posted  as  debit 

to  cash  account  at  end 

of  month. 


TRANSACTION 
Customer  pays  cash  on 
account.   Entered 
in  cash  receipts 
book,  amount  being 
placed  in  column 
headed  "Customers 
Ledger. " 


CREDIT 
To  customer,  posted 

direct  ;  will  also  be  a 
credit  to  "Customers 
Ledger*  account  when 
total  of  column  is 
posted  at  end  of 
month. 


2.  Customer  settles  ac- 

count by  giving 
note.   Entered  in 
journal,  amount  be- 
ing placed  both  in 
debit  "General 
Ledger"  column  and 
credit  "Customers 
Ledger"  column. 

3.  A  note  payable  is 

paid.   Entered  in 
cash  disbursement 
book,  amount  being 
placed  both  in 
"General  Ledger" 
column  and  "Bank 
Withdrawals"  col- 
umn. 

4.  An  auto  is  sold  to  a 

customer.   Entered 
in  sales  book, 
amount  being  placed 
in  "Amount"  column 
and  in  "Auto  Sales" 
column. 


To  notes  receivable ; 
posted  direct. 


Same  as  above. 


To  notes  payable  ;  posted 
direct. 


To  cash;  total  cash  dis- 
bursements posted  to 
credit  of  cash  account 
at  end  of  month. 


To  customer,  posted 

direct  ;  will  also  be  a 
debit  to  "Customers 
Ledger"  account  when 
total  of  "Amount" 
column  is  posted  at 
end  of  month. 


To  Auto  Sales  ;  total  of 
"Auto  Sales"  column 
posted  to  credit  of 
"Auto  Sales"  account 
at  end  of  month. 


The  special  columns  may  be  regarded  as  temporary  resting-places  for  con- 
stantly recurring  items.  At  the  end  of  the  month,  or  other  convenient  period, 
the  columns  are  footed,  the  correctness  proved  by  cross-footing,  and  the 
totals,  except  that  of  the  "General  Ledger"  columns,  posted  to  the  proper  ac- 
counts. '  There  is  no  need  of  posting  the  total  of  the  "General  Ledger"  column 
since  all  the  details  therein  have  already  been  posted  to  accounts  in  the 
general  ledger. 

REFERENCES : 

Cole,  Chapter  VI 

Esquerre,  Chapters  XI  and  VIII 


Copyright,  1917,  The  Ronald  Press  Company 


1-8-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  8 

CASH 


Problem  6 


From  the  following  trial  balance  and  other  information  prepare: 

(a)  Balance  sheet  at  December  31,  1917. 

(b)  Statement  of  profit  and  loss  for  year  ending  December  31,  1917, 

using  report  form  of  statement. 

(c)  Statement  of  partners*  capital  accounts  at  December  31,  1917. 


WAHR  AND  COOK— TRIAL  BALANCE  AT  DECEMBER  31,  1917 


John  Wahr — Capital  Account 

John  Cook —   "       " 

John  Wahr — Drawing  Account 

John  Cook —   "       ■ 

Mortgage  Payable 

Accounts    ■ 

Bank  Loans 

Land 

Buildings 

Office  Fixtures 

Cash 

Petty  Cash  Fimd 

Accoimts  Receivable 

Notes  Receivable 

Inventory  of  Merchandise  January  1,  1917 

Sales 

Return  Sales 

Allowances  on  Sales 

Freight-Out 

Purchases 

Freight-In 

Return  Purchases 

Clerks'  Salaries 

Advertising 

Trimming  and  Decorating 

Office  Expenses 

Heat  and  Light 

Taxes 

Miscellaneous  Expenses 

Interest  on  Bank  Loans 

Interest  on  Mortgage 

Discount  on  Sales 

Discount  on  Purchases 


$2,000.00 
1,000.00 


5,000.00 

16,000.00 

4,600.00 

2,360.00 

100.00 

27,940.00 

660.00 

12,800.00 

2,500.00 

1,300.00 

200.00 

46,000.00 

1,400.00 

6,000.00 

1,400.00 
600.00 

1,200.00 
600.00 
240.00 

4,500.00 
360.00 
500.00 
640.00 


$30,000.00 
10,000.00 


10,000.00 

15,600.00 

5,400.00 


68,000.00 


600.00 


300.00 


$139,900.00   $139,900.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-8-2 

The  inventory  of  merchandise  December  31,  1917,  is  $11,400.   There  is  also 
the  following  inventory  of  supplies:  office  supplies  $200;  coal  $50;  decorat- 
ing supplies  $150.   Clerks'  salaries  unpaid  amount  to  $230;  advertising  bills 
$75  ;  coal  and  light  bills  $90  ;  and  miscellaneous  .expense  bills  $205.   None  of 
these  bills  have  been  entered  on  the  books  due  to  the  system  of  bookkeeping  of 
not  recording  expense  bills  until  they  are  paid. 

The  following  extracts  in  regard  to  the  division  of  profits  and  losses 
have  been  taken  from  the  articles  of  copartnership: 

"John  Cook  shall  give  his  full  time  and  attention  to  the  business  and 
shall  be  allowed  a  salary  of  $7,000  per  annum  for  his  services  in  this  re- 
spect.  John  Wahr  shall  also  give  his  full  time  and  attention  to  the  business 
and  shall  be  allowed  a  salary  of  $2,000  per  annum  for  his  services. 

"The  profits  and  losses  of  the  business  shall  be  divided  in  proportion  to 
the  capital  accounts  of  the  partners  at  the  beginning  of  each  year." 

The  partners  have  not  drawn  their  salary  for  the  present  year  nor  has  the 
same  been  given  expression  on  the  books  as  yet. 

All  sales  are  on  terms  1%   10  days,  net  90  days,  and  purchases  are  on  prac- 
tically similar  terms. 


MISCELLANEOUS  QUESTIONS 

Question  20 — The  X  Company  employs  a  salesman  to  whom  it  has  advanced  $250 
to  cover  his  expenses.   The  $250  is  carried  as  a  working  fund.   As  his  expense 
reports  are  rendered  he  is  reimbursed  for  the  amount  of  expenses  shown  in  the 
i-eport.   The  fiscal  period  of  the  company  ends  on  December  31.   In  an  examina- 
tion of  the  books  it  is  found  that  while  an  expense  report  was  rendered  and 
received  on  December  31,  no  entry  thereof  was  made  until  January  3,  when  a 
check  was  made  out  and  charged  to  "Salesmen's  Traveling  Expenses."   State  how 
the  matter  should  have  been  handled  on  December  31  in  order  to  state  correctly 
the  expenses  of  that  month.   Give  the  journal  entries,  if  any,  that  would  have 
been  necessary. 

Question  21 — Outline  in  detail  some  method  of  handling  cash  receipts. 


WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

SUMMARY  OF  TRANSACTIONS 

MARCH  9 
Receive  20-day  note  of  George  Wilson  for  $230,  bearing  interest  at  6%,  to 
apply  on  account.   Sale  to  W.  F.  Newton  of  accessories  and  supplies  amounting 
to  $42,000  less  10%,  and  5%;  terms  1/10,  net  30  days. 

MARCH  10 
Pay  bill  of  New  York  Auto  Supply  Co.  amounting  to  $1,350  from  which  we 
deduct  1%  discount  which  they  have  allowed.   Give  Wilson  Manufacturing  Co.  our 
10-day,  non-interest-bearing  note  for  $1,600  to  apply  on  account. 

Copyright,  1917,  The  Ronald  Press  Company 


1-8-3 

MARCH  12 
Create  a  petty  cash  fund  of  $100  by  drawing  a  check  for  that  amount  in 
favor  of  the  petty  cashier.   Give  Well-Built  Auto  Co.  our  6%  interest-bearing 
note  for  30  days,  amounting  to  $20,000  to  apply  on  invoice  No.  7866,  and  pay 
balance  of  this  invoice  in  cash,  being  allowed  2%  discount  on  balance. 

MARCH  14 
Receive  20-day  non-interest-bearing  note  of  George  Wilson  for  $8,000  in 
full  of  account.   Frank  Rice  returns  an  auto  sold  him  on  March  8,  sales  price 
$2,000,  which  we  credit  to  his  account.   Pay  premium  of  $60  on  fire  insurance 
policy  for  one  year  from  March  1  of  this  year  (charge  Unexpired  Insurance). 

MARCH  15 
Sale  to  Barnhart  &  Co.  of  four  autos,  $16,000,  less  10%,  5%,  and  10%, 
terms  1/20,  net  60  days.   Pay  for  janitor  services,  $50  (charge  General  Ex- 
pense) • 

MARCH  17 
Pay  invoice  No.  678,  amounting  to  $12,580,  of  Wilson  Manufacturing  Co. 
less  1%  discount.   Frank  Rice  is  allowed  a  rebate  of  $200  on  sale  to  him  March 
8,  and  pays  balance  of  $15,800,  less  1%  discount  allowed  to  him  (charge  Auto 
Rebates  and  Allowances  with  rebate  of  $200). 

Solution  to  Problem  3 

(a)  Journal  entries  necessary  to  record  the  transfer  of  assets  and  lia- 
bilities of  H.  A.  Cole  to  Cole  and  Nelson: 

(1) 

Cole  and  Nelson,  Vendee  $94,800.00 

To — Land  $12,000.00 

Buildings  13,000.00 

Machinery  and  Tools  12,000.00 

Notes  Receivable  2,700.00 

Customers'  Accounts  15,500.00 

Cash  2,100.00 

Merchandise  Inventory  37,500.00 

To  record  transfer  of  assets  to  Cole  and  Nelson 

(2) 
Accounts  Payable  12,200.00 

Notes  Payable  6,000.00 

To— Cole  and  Nelson,  Vendee  18,200.00 

To  record  assiimption  of  liabilities  by  Cole  and 
Nelson. 

(3) 

H.  A.  Cole— Capital  Account  76,600.00 

To — Cole  and  Nelson,  Vendee  76,600.00 

To  record  transfer  of  capital  to  Cole  and 
Nelson. 

Copyright,  1917,  The  Ronald  Press  Company 


1-8-4 
(b)  Journal  entries  necessary  to  record  the  contributions  of  H.  A.  Colo 
and  W.  H.  Nelson  to  the  firm  of  Cole  £ind  Nelson. 


(1) 
Land  $12,000.00 

Buildings  13,000.00 

Machinery  and  Tools  12,000.00 

Notes  Receivable  2,700.00 

Customers'  Accounts  15,500.00 

Cash  2,100.00 

Merchandise  Inventory  37,500.00 

To — H.  A.  Cole — Capital  Account  $94,800.00 

To  record  the  transfer  of  assets  from  the  business  of 

H,  A,  Cole,  as  per  articles  of  partnership. 


Section- 


(2) 
H.  A.  Cole — Capital  Account  18,200.00 

To — Accounts  Payable  12,200.00 

Notes  Payable  6,000.00 

To  record  the  assumption  of  liabilities  of  business  of 
H.  A.  Cole,  as  per  articles  of  partnership. 
Section 


(3) 
Cash  25,000.00 

Land  4,000.00 

Buildings  20,000.00 

Notes  Receivable  6,000.00 

To — W.  H.  Nelson — Capital  Account  55,000.00 

To  record  contribution  of  W.  H.  Nelson  as  per  articles 
of  partnership.  Section 


Solution  to  Problem  4 

(a) 

MACK  &  SCHMIDT 

PROFIT  AND  LOSS  ACCOUNT 

DEBITS  CREDITS 

Dec.  31,  1917  Expenses  (in  Dec.  31,  1917  Income  (in 

detail)  $ detail) 


Dec.  31,  1917  BALANCE— Net 
Profit  for  year  carried 
down  11,000.00 


Copyright,  1917,  The  Ronald  Press  Company 


Dec.  31,  1917  Fred  Mack, 

Salary 
Dec.  31,  1917  John  Schmidt, 

Salary- 
Dec.  31,  1917  Fred  Mack, 

Interest  on  Capital 
Dec.  31,  1917  John  Schmidt, 

Interest  on  Capital 


$6,000.00 

4,000.00 

4,200.00 

3,000.00 

$17,200.00 


Dec.  31,  1917  Net  Profit 

brought  down 
Dec.  31,  1917  Balance — 
Net  Loss  divided  as 
follows: 

Fred  Mack   $3,100.00 
John  Schmidt  3,100.00 


1-8-5 
$11,000.00 


6,200.00 


$17,200.00 


(b) 
STATEMENT  OF  PARTNERS'  CAPITAL  ACCOUNTS,  DECEMBER  31,  1917 


Balance,  January  1,  1917 
Add — Salary 

Interest  on  Capital  Invested 


Less — Loss  for  year 


Less — Withdrawals 


MACK 
$70,000.00 
6,000.00 
4,200.00 

$80,200.00 
3,100.00 

$77,100.00 
4,000.00 


SCHMIDT 
$50,000.00 
4,000.00 
3,000.00 

$57,000.00 
3,100.00 

$53,900.00 
5,000.00 


TOGETHER 
$120,000.00 
10,000.00 
7,200.00 

$137,200.00 
6,200.00 

$131,000.00 
9,000.00 


Capital  Investment,  December  31,  1917  $73,100.00 


$48,900.00    $122,000.00 


ANSWERS  TO  QUESTIONS 


Answer  to  Question  13 — 


STATUS  OF  PARTNERS'  CAPITAL  ACCOUNTS—DOE  AND  ROE 

DOE  ROE 

Initial  Investment  $10,000.00    $8,000.00 

Profit  on  Sale  of  Real  Estate  1,000*00     1,000.00 


Loss  during  year 
Balance 

Answer  to  Question  14 — 


Smith — Capital  Account 

To — Cole — Capital  Account 
To  record  sale  by  Smith  of  one-half  of  his 

interest  to  Cole,  as  per  articles  of  part- 
nership of  James,  Smith  and  Cole,  Sec- 
tion  . 


$11,000.00    $9,000.00 
1,500.00     1,500.00 


TOGETHER 
$18,000.00 
2,000.00 

$20,000.00 
3,000.00 


$  9,500.00     $7,500.00    $17,000.00 


$10,000.00 


$10,000.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-8-6 
Answer  to  Question  15 — A  third  interest  in  the  capital  of  James  &  Smith 
has  a  book  value  of  $10,000.   This  interest  is  sold  to  Cole  for  $7,000,  leav- 
ing a  loss  of  $3,000  to  be  divided  between  Smith  and  James  in  accordance  with 
the  profit  and  loss  sharing  ratio,  viz..  Smith  2/3  or  $2,000,  and  James  1/3  or 
$1,000.   The  entry  required  is: 

Cash  $  7,000.00 

Smith — Capital  Account   '  2,000.00 

James — Capital  Account  1,000.00 

To — Cole — Capital  Account  $10,000.00 

To  record  cash  investment  of  Cole  and  adjust- 
ment of  capital  accounts  in  accordance 
with  partnership  agreement  dated . 

Answer  to  Question  16 — A  trade  discount  is  the  discount  to  be  subtracted 
from  a  catalogue  or  quoted  price  in  order  to  arrive  at  the  actual  selling 
price.   It  will  not  be  added  back  in  case  a  prompt  payment  is  not  made.   It  is 
used  to  conceal  the  cost  price  from  the  customer  who  may  examine  the  catalogue 
in  the  dealer's  hands;  to  obviate  the  necessity  of  issuing  a  new  catalogue 
whenever  market  prices  change  (since  all  that  need  be  done  is  to  issue  a  new 
trade  discount)  ;  to  permit  a  ready  means  of  quoting  different  prices  to  dif- 
ferent dealers,  etc.  A  cash  discount  is  a  discount  allowed  for  prompt  payment 
of  invoices  and  may  be  deducted  only  if  payment  is  made  within  the  time  speci- 
fied on  the  invoice. 

"7/10  n/60"  means  that  the  invoice  is  payable  60  days  from  date  thereof 
and  that  if  the  payment  is  made  within  10  days  from  date  of  invoice  a  deduc- 
tion of  7%  of  the  invoice  price  will  be  allowed. 

The  prevailing  opinion  seems  to  be  that  a  discount  exceeding  2%  ten  days 
is  a  trade  discount.   Seven  per  cent  would  seem  to  be  too  large  a  discount  to 
come  under  the  title  of  cash  discount,  even  though  it  could  not  be  deducted  if 
payment  were  not  made  within  ten  days. 

Answer  to  Question  17 — 

Amount  of  invoice        $1,000.00 
Deduct — 30%  300.00 


$  700.00 
Deduct— 10%  70.00 


$  630.00 
Deduct — 5%  31.50 


Net  invoice  price       $  598.50 
Deduct — 2%  11.97 


Amount  of  check  sent     $  586.53 


The  amount  of  $598.50  would  ordinarily  appear  on  the  invoice  when  issued 
by  the  selling  company. 

Copyright,  1917,  The  Ronald  Press  Company 


1-8-7 

CASH 
CASH  ACCOUNT — Since  the  cash  book  is  in  itself  a  cash  account,  a  general 
ledger  account  with  cash  is  optional.   It  is  preferable,  however,  to  keep  a 
cash  account  where  the  cash  book  is  divided  into  one  or  more  cash  receipt 
books  and  one  or  more  cash  disbursement  books,  and  its  advantages  are  also  ap- 
parent when  taking  off  trial  balances  where  cash  books  are  not  kept  by  the 
general  ledger-keeper. 

PROVING  CASH — The  cash  balance  as  shown  by  the  cash  book  should  equal  the 
amount  in  bank  plus  the  amount  in  cash  drawer.   The  amount  in  the  bank  should 
be  detailed  in  a  separate  record,  or  in  separate  columns  in  the  cash  book, 
which  will  show  deposits  and  number  and  amount  of  checks  drawn.  At  the  end  of 
the  month  the  statement  received  from  the  bank  should  be  reconciled  with  the 
balance  in  the  cash  book  on  the  same  date.   The  following  statement  was  pre- 
pared September  1,  1917: 

A  &  B 

STATEMENT  SHOWING  RECONCILIATION  OF  BANK  STATEMENT 

WITH  CASH  BOOK,  AUGUST  31,  1917 

Balance  in  bank  per  bank  statement  dated  August  30,  1917  $3,416.73 

Add — Deposit  made  on  August  30,  1917,  not  taken  up  by  bank 

until  September  1,  1917  456.40 


$3,873.13 


Deduct — Checks  outstanding: 

NUMBER  AMOUNT 

512  $16.50 

515  71.00 

521  42.30 

522  1.60 

523  10.25 

524  26.60  168.25 


Balance  as  per  check  stubs  $3,704.88 

Add~(l)  Bank  debit  slip  #6875— J.  J.  Smith's  check  returned 

marked  "N.  S.  F."  100.00 

(2)  Cash  in  cash  drawer  417.54 


Balance  cash  on  hand  and  in  bank,  per  cash  book  $4,222.42 


SAFEGUARDING  CASH— The  first  step  in  safeguarding  cash  is  to  separate  the 
function  of  receiving  cashier  from  that  of  paying  cashier,  the  latter  making 
his  payments  by  check,  or,  in  case  payments  are  of  a  small  amount,  from  a  spe- 
cial cash  fund  kept  for  that  purpose.   This  separation  of  function  is  called 
the  IMPREST  system  of  keeping  cash  and  may  be  described  in  further  detail  as 
follows: 

1.  Cash  receipts  are  deposited  intact  in  the  bank  at  the  end  of  each  day. 
The  deposits  reported  by  the  bank  pass-book  or  by  the  monthly  bank  statement 
may  thus  be  checked  in  total  and  in  detail  with  the  cash  receipts  book. 

Copyright,  1917,  The  Ronald  Press  Company 


1-8-8 

2.  Cash  disbursements  are  made  by  check.   The  bank  statement  and  can- 
celled checks  may  be  checked  with  the  cash  disbursements  book.   Thus  the  cash 
book  becomes  a  detailed  record  of  bank  deposits  and  withdrawals. 

3.  Not  all  cash  disbursements  can  be  made  by  check,  however.   Stamps, 
carfare,  and  small  supplies  and  expenses  can  be  paid  for  only  in  currency. 
For  this  purpose  a  PETTY  CASH  FUND  is  maintained,  the  operation  of  which  is 
described  in  a  subsequent  paragraph. 

SAFEGUARDING  CASH  RECEIPTS — The  use  of  cash  registers  in  a  retail  busi- 
ness assists  in  safeguarding  cash  receipts.   Each  department  is  provided  with 
one  or  more  cash  registers  to  record  cash  sales,  and  total  wheels  in  the  reg- 
ister will  indicate  the  receipts  for  the  day  which  should  tally  first  with  the 
cash  in  the  till  and  secondly  with  the  cash  sales  reported  by  the  various 
salesmen  in  the  department. 

In  a  wholesale  business,  or  in  a  retail  business  where  checks  are  received 
through  the  mails  in  payment  of  accounts,  CASH  BLOTTERS  are  usually  provided, 
consisting  of  a  record  made  by  the  person  or  persons  opening  the  mail.   This 
record  is  checked  daily  with  the  cashiers*  reports.   Cashiers  should  not  be 
allowed  access  to  blotters,  journals,  or  customers  ledgers. 

SAFEGUARDING  CASH  DISBURSEMENTS — Under  the  imprest  system  of  keeping  cash 
all  disbursements  are  made  by  check.  Even  petty  cash  payments  are  eventually 
recorded  by  check.  But  the  check  itself  would  not  constitute  an  adequate  re- 
ceipt for  the  payment.   There  must  be  a  supporting  voucher  indicating  the 
REASON  and  DETAIL  of  the  value  received,  and  this  voucher  should  be  approved 
by  a  responsible  official  before  payment  is  made.  Usually  the  responsibility 
of  the  official  signing  the  check  is  limited,  being  confined  to  noting  whether 
or  not  the  accompanying  voucher  bears  the  0  K  of  the  proper  sub-officials. 

PETTY  CASH  FUND — A  petty  cash  fund  is  a  cash  fund  kept  for  the  purpose  of 
making  small  payments  which  cannot  be  made  conveniently  by  check,  and  is  oper- 
ated as  follows: 

1.  A  petty  cash  fimd  is  first  created  by  making  out  a  check  for  some 
convenient  amount,  say  $200,  and  cashing  it.   The  check  may  be  cashed  by  the 
receiving  cashier  or  directly  at  the  bank.   In  case  the  receiving  cashier 
handles  it,  he  will  deposit  it  along  with  the  other  checks  and  cash  making  up 
the  receipts  even  though  it  is  the  firm's  own  check. 

2.  The  amount  of  the  check  is  debited  to  a  "Petty  Cash  Fund"  account  in 
the  general  ledger. 

3.  The  $200  will  be  entrusted  to  a  "petty  cashier"  who  is  made  respon-  • 
sible  for  handling  it  properly  and  who,  upon  demand,  must  show  either  cash  or 
properly  approved  vouchers,  or  both,  to  make  up  the  total  of  $200.  A  petty 
cash  voucher  usually  consists  of  a  small  blank  containing  spaces  for  reasons 
covering  payment,  signature  of  person  authorizing,  and  signature  of  person  re- 
ceiving cash.  A  PETTY  CASH  BOOK  is  usually  kept  which  may  consist  of  a  sum- 
mary of  payments  only. 

Copyright,  1917,  The  Ronald  Press  Company 


1-8-9 

4.  Whenever  the  cash  on  hand  in  the  petty  cash  fund  becomes  depleted  or 
nearly  so,  the  petty  cashier  presents  his  petty  cash  book  together  with  sup- 
porting vouchers  to  the  proper  official.   A  statement  should  also  be  prepared 
(a  "RECAP")  showing  the  accounts  to  which  the  disbursements  are  chargeable. 
For  the  purposes  of  illustration,  assume  there  have  been  fifty  payments 
amounting  to  $185  from  the  fund  of  $200,  chargeable  as  follows:  postage  $50; 
carfare  $10;  office  supplies  $100;  stationery  $25.   A  check  for  $185  is  issued 
to  the  petty  cashier  and  cashed  by  him  in  the  same  manner  as  the  initial 
check.   The  amount  of  the  check  ($185)  is  entered  in  the  cash  disbursements 
book  and  charged  to  the  several  accounts  indicated  by  the  "recap."  Further 
petty  cash  payments  will  be  handled  in  the  same  way. 

5.  Whenever  financial  statements  are  prepared  it  is  usual  to  reimburse 
the  petty  cashier  in  full  on  the  closing  date  so  that  the  balance  sheet  will 
show  petty  cash  which  consists  of  actual  currency.   If,  however,  he  has  not 
been  reimbursed  at  the  end  of  the  fiscal  period,  and  if  he  holds  vouchers,  as 
above,  amounting  to  $185,  the  following  journal  entry  would  be  made: 

-December  31,  1916- 

Postage  $  50.00 

General  Expense  (carfare)  10.00 

Office  Supplies  100.00 

Stationery  25.00 

To— Petty  Cash  Fund  $185.00 

To  record  payments  from  petty  cash  not  taken  up  on  above  date. 

On  the  balance  sheet  the  petty  cash  will  appear  as  $15.  At  the  beginning 
of  the  next  month,  January  1,  1917,  a  reversing  entry  would  be  made  to  CREDIT 
the  expense  accounts  for  the  amounts  with  which  they  are  later  DEBITED,  thus: 

-January  1,  1917- 
Petty  Cash  Fund  $185,00 

To— Postage  $  50.00 

General  Expense  10.00 

Office  Supplies  100.00 

Stationery  25.00 

To  reverse  entry  made  on  December  31,  1916. 

The  second  entry  will  also  restore  the  petty  cash  fund  account  to  the 
original  sum;  the  petty  cashier  will  be  reimbursed  later  in  the  usual  way. 

WORKING  FUNDS — A  WORKING  FUND  represents  cash  advanced  to  an  employee  or 
branch  office  in  order  that  such  employee  or  branch  office  may  make  disburse- 
ments.  It  differs  from  the  petty  cash  fund  in  that  it  is  not  reimbursed  for 
the  exact  amount  of  payments  made.   Cash  remittances  are  made  usually  in  round 
sums  and  are  charged  to  the  working  fund,  the  latter  being  credited  when  re- 
ports of  payments  are  made.   In  case  the  cashier  in  charge  of  the  fund  re- 
ceives cash  from  various  sources,  the  receipts  are  charged  to  the  fund.   In 
some  cases  the  fimd  is  large  enough  to  warrant  part  or  all  of  it  being  kept  in 
a  bank  account  and  disbursements  made  by  check. 

REFERENCES : 

Esquerre,  Chapter  XIII 

Copyright,  1917,  The  Ronald  Press  Company 


1-9-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  9 

CONSIGNMENTS  ;  PROMISSORY  NOTES 


Problem  7 

The  consignments -out ward  record  of  Chapman  and  Miner  contains  the  follow- 
ing information  regarding  shipments  made  in  September,  1917,  and  shipments 
made  in  previous  months  but  not  closed  out  at  September  1: 


RETURNS 
AMOUNT     REMARKS 

;  300.00  Draft 

275.00  Net  Proceeds 
821.00  Net  Proceeds 
680.00  Net  Proceeds 

1,000.00  Draft 

674.00  Net  Proceeds 
800.00  Draft 


SHIPMENT 

DATE  OF 

CHARGES 

NUMBER 

SHIPMENT 

COST 

AMOUNT  EXPLA- 
NATION 

DATE 

696 

Aug.   5 

$ 

455.00 

$8.00  Freight 

Aug.   8 
Sept.  18 

699 

■    30 

780.00 



"   15 

801 

Sept.   5 

660.00 

15.00  Freight 

"   16 

802 

"   14 

1 

,540.00 

46.00  Freight 

"   16 
"   25 

803 

•   22 

1 

,056.00 

. _ 

»   27 

804 

■   25 

875.00 

16.00  Freight 

. 

The  above  record  is  a  memorandum  book.   Entries  are  recorded  on  the  gen- 
eral books  at  the  end  of  each  month  rather  than  on  the  dates  on  which  ship- 
ments are  made.   On  the  balance  sheet  prepared  August  31  there  was  shown  imme- 
diately below  the  merchandise  inventory:   "Consignments-Outward,  $943.00," 
and  a  similar  account  appears  in  the  general  ledger.   Freight  paid  in  Septem- 
ber has  been  debited  to  a  Freight  account,  while  the  drafts  and  net  proceeds 
received  in  September  have  been  credited  to  an  account  called  "Receipts  from 
Consignments-Outward. ■ 

(a)  Prepare  Journal  entries  necessary  to  adjust  the  general  records  so  as 
to  record  the  above  information  at  September  30,  1917. 

(b)  What  criticism  would  you  offer  as  to  the  method  of  carrying  consign- 
ments-outward on  the  balance  sheet? 


MISCELLANEOUS  QUESTIONS 

Question  22 — On  March  30,  1917,  the  A  B  Seed  Co.  consigned  to  C  D,  a  local 
retail  dealer,  15,200  packages  of  flower  seeds  which  C  D  agrees  to  dispose  of 
at  10  cents  per  package,  the  consideration  being  20%  on  the  sales.   On  Au- 
gust 1,  1917,  the  seed  company's  traveling  representative  finds  that  2,490 
packages  remain  unsold  and  these  are  returned  to  the  A  B  Co.  Prepare  an  ac- 
count sales  including  among  the  deductions  freight  paid  by  the  dealer  amount- 
ing to  14.75. 

Copyright,  1917,  The  Ronald  Press  Company 


1-9-2 
Question  23 — It  is  the  practice  in  a  certain  corporation  to  debit  custom- 
ers* accounts  and  credit  sales  account  when  consignments  are  shipped.   These 
consignments  are  not  closed  out  as  a  rule  for  several  months.  Explain  in  what 
way,  if  any,  this  method  of  handling  consignments  would  affect  the  accounts 
when  financial  statements  are  prepared. 

Question  24 — A  promissory  note  reads  as  follows: 

January  7,  1917. 
$1,500.00 

Ninety  days  after  date  I  promise  to  pay  to  the  order  of  James  S. 
Lynn  Fifteen  Hundred  Dollars  with  interest  at  6%. 

Edward  G.  Kemp. 

Fifteen  days  after  the  date  of  issue  J.  S.  Lynn  discounts  the  note  at  the 
bank,  the  rate  of  discount  being  5%.   Compute  the  proceeds.  Also  prepare 
entries  necessary  to  record  the  transactions  on  the  books  of  Lynn  and  Kemp, 
respectively. 


WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

SUMMARY  OF  TRANSACTIONS 

MARCH  19 
Ship  W.  F.  Newton  a  consignment  of  four  autos,  costing  us  $6,000,  to  be 
sold  on  a  commission  basis  (to  be  known  as  Consignment-Outward  No.  1).   Our 
non- interest  bearing  30-day  note  for  $6,000  is  discounted  by  the  bank  at  6% 
(credit  Bank  Loan  account).   An  allowance  is  made  W.  F.  Newton,  on  account  of 
goods  returned  from  shipment  of  March  9,  the  list  price  of  the  returns  being 
$2,000.   He  pays  the  balance  of  the  invoice  covering  this  shipment  in  cash 
less  a  discount  of  1%. 

MARCH  21 
Pay  our  note  for  $1,600  dated  March  10  in  favor  of  Wilson  Manufacturing 
Co.  Sale  to  Frank  Rice  of  accessories  and  supplies,  $9,400,  for  which  he  gives 
us  a  30-day  note  for  $2,400;  terms  on  balance  1/10,  net  30  days.  We  discount 
the  note  immediately  at  the  bank  at  6%. 

MARCH  22 
Pay  advertising  bill  for  March  and  April  in  Automobile  Gazette,  $350. 

MARCH  23 
Ship  James  Garage  Co.  a  consignment  of  ten  automobiles  costing  us  $18,000, 
to  be  sold  on  a  commission  basis  (Consignment-Outward  No.  2).   Pay  freight 
bill  of  $300  on  above  consignment. 

MARCH  24 
Receive  accessories  from  New  York  Auto  Supply  Co.,  $22,000,  invoice  7621, 
terms  1/15,  net  60  days,  f.o.b.  destination. 

Copyright,  1917,  The  Ronald  Press  Company 


1-9-3 
MARCH  26 
W.  F.  Newton  sends  us  an  account  sales  on  Consignment-Outward  No.  1,  as 
follows : 

ACCOUNT  SALES  WITH  MILLER  BROS. 

SALES— 4  autos  at  $2,200  each                              $8,800.00 

DEDUCT— Storage  $100.00 

Insursmce  50.00 

Freight  170.00 

10%  Commission  880.00   1,200.00 


Net  Proceeds  $7,600.00 


He  does  not  remit  thereon,  but  agrees  to  pay  in  10  days,  which  is  satis- 
factory to  us. 

MARCH  27 
We  pay  freight  of  $100  on  invoice  No.  7621  of  New  York  Auto  Supply  Co. 
purchased  March  24.   (Should  this  be  charged  to  Accessories  and  Supplies 
Freight-In  or  to  New  York  Auto  Supply  Co.?) 

MARCH  29 
George  Wilson  pays  his  20-day  note  received  March  9,  with  interest  at  6%, 
together  with  his  note  of  March  14. 

MARCH  30 
Sell  E.  T.  Adams  two  autos  at  $2,000  each,  and  accessories  $6,000,  total 
$10,000;  terms  1/5,  net  60  days. 

MARCH  31 
Paid  for  shipping  crates  and  wrapping  paper  from  Chicago  Paper  Co.,  bill 
|1,520  less  1%  cash  (charge  Miscellaneous  Selling  Expense).   We  take  discount. 

Solution  to  Problem  5 

ENTRIES  ON  BOOKS  OF  CHICAGO  OFFICE 

(1) 
Evanston  Office  $3,500.00 

To — Profit  and  Loss  $3,500.00 

To  take  up  profit  reported  by  Evanston,  as  per  their 
statement,  for  year  ending  July  31. 

(2) 
Profit  and  Loss  9,500.00 

To — A.  Stone — Capital  account  4,750.00 

B.  Madison — Capital*  account  4,750.00 

To  distribute  net  profit  for  year  to  capital  accounts. 

Copyright,  1917,  The  Ronald  Press  Company 


1-9-4 
ENTRIES  ON  BOOKS  OF  EVANSTON  OFFICE 

(1) 
Merchandise  Inventory  $500.00 

To— Chicago  Office  $500.00 

To  take  up  shipment  of  merchandise  received  July  31, 
but  not  yet  recorded. 


(2) 


Profit  and  Loss 

To — Chicago  Office 
To  transfer  net  profit  for  year. 


3,500.00 


3,500.00 


STONE  AND  MADISON 

CHICAGO  AND  EVANSTON 

BALANCE  SHEET,  JULY  31,  1917 


CURRENT  ASSETS 
Cash 

Accounts  Re- 
ceivable 
Merchandise 


CAPITAL  ASSETS; 

Land  and 
Buildings 

Office  Fix- 
tures 


ASSETS 

$10,400.00 

16,100.00 

17,500.00  $44,000.00 


$12,000.00 


LIABILITIES 
CURRENT  LIABILITIES: 
Accounts  Payable 

CAPITAL  ACCOUNTS: 
A.  Stone — 
Balance, 
August  1, 

1916       $20,000.00 
Profits  for 
year         4,750.00 


2,000.00   14,000.00   B.  Madison — 
Balance, 


$13,500.00 


24,750.00 


$58,000.00 


August  1, 

1916       $15,000.00 

Profits  for 

year        4,750.00   19,750.00 


$58,000.00 


Copyright,  1917,  The  Ronald  Press  Company 


ANSWERS  TO  QUESTIONS 
Answer  to  Question  18— 

(a)  A  method  that  may  be  used  is  as  follows: 

CASH  RECEIPTS  BOOK 


1-9-5 


DATE    PARTICULARS   FOLIO 


31  General  Ledger 

(already  posted)  -  - 
31  Customers  Ledger 

Cr.  321 


31  Discount  on  Sales 

Dr.  982 


31  Balance  on  hand 
May  1 


GENERAL 
LEDGER 

CUSTOMERS 
LEDGER 

DISCOUNT 
ON  SALES 

BANK 
DEPOSITS 

$10,000.00 
50,000.00 

$50,000.00 

$550.00 

$64,350.00 

$60,000.00 
550.00 

$59,450.00 
4,900.00 

$64,350.00 

$64,350.00 

CASH  DISBURSEMENTS  BOOK 


DATE 


PARTICULARS   FOLIO 


GENERAL 
LEDGER 


CREDITORS 
LEDGER 


DISCOUNT 

ON  PUR-      BANK 
CHASES    WITHDRAWALS 


31  General  Ledger 

(already  posted)-  - 
31  Creditors  Ledger 

Dr. 


31  Discount  on  Pur- 
chases Cr. 


31  Balance  on  hand 
May  31 


501 


881 


$23,000.00 

40,000.00 

$63,000.00 

600.00 

$62,400.00 

1,950.00 

$64,350.00 


$40, 000..  00   $600.00   $62,400.00 


1,950.00 
$64,350.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-9-6 
(b)  Journalizing  the  totals  of  a  book  of  original  entry  is  generally  con- 
sidered unnecessary.   Some  bookkeepers  claim  in  support  of  the  practice  that 
all  the  entries  going  into  the  ledger  should  appear  in  the  general  journal; 
but  where  the  "General  Ledger"  or  "Sundry"  column  contains  many  items,  their 
transfer  to  another  journal  would  seem  to  involve  a  large  amount  of  duplica- 
tion. 

Answer  to  Question  19 — Each  item  entered  in  the  cash  disbursement  book 
will  be  a  credit  to  cash  and  a  debit  to  some  account  indicated  by  the  entry. 
The  credit  will  be  made  to  the  cash  account  at  the  end  of  the  month  by  posting 
thereto  the  total  of  the  cash  payments  during  that  month.  As  for  the  debits, 
the  total  of  the  general  ledger  column  will  not  be  posted  since  the  details 
have  already  been  debited  to  accounts  in  the  general  ledger;  the  total  of  the 
creditors  ledger  column  will  be  posted  to  the  debit  of  the  creditors  ledger 
controlling  account  in  the  general  ledger  since  the  details  have  been  posted 
during  the  month  only  to  the  subsidiary  ledger.   The  total  of  the  discounts  on 
purchases  will  be  posted  as  a  credit  to  the  proper  account  in  the  general 
ledger  since  the  discount  has  been  added  to  the  actual  payments  in  order  that 
the  gross  amount  might  be  debited  to  the  creditors'  accounts.   The  amount  to 
be  posted  to  the  credit  of  the  cash  account  will  be  ascertained  by  adding  the 
total  of  the  general  ledger  column  to  the  total  of  the  creditors  ledger  column 
and  subtracting  the  total  of  the  discounts  on  purchases  account  therefrom. 


Copyright,  1917,  The  Ronald  Press  Company 


1-9-7 

CONSIGNMENTS 
DEFINITION — A  consignment  is  a  shipment  of  goods  from  one  party  to  an- 
other, the  latter  acting  as  the  agent  of  the  shipper  in  disposing  of  them. 
The  shipper  of  the  goods  is  called  the  CONSIGNOR  and  the  recipient  the  CON- 
SIGNEE or  COMMISSION  MERCHANT.   The  last  term  is  generally  confined  to  the 
produce  and  grocery  business. 

SETTLEMENT  BY  CONSIGNEE — When  the  goods  shipped  are  disposed  of  by  the 
consignee,  he  is  required  to  remit  the  proceeds  to  the  shipper  or  consignor. 
His  commission  for  making  the  sale  is  usually  a  stated  percentage  of  the  gross 
sales,  and  before  remitting  he  is  entitled  to  deduct  such  commission  together 
with  other  expenses  incurred  in  selling  the  goods.   The  amount  sent  the 
shipper  is  termed  the  NET  PROCEEDS  from  the  sale,  while  the  accompanying 
statement  showing  the  selling  price  to  customers  and  the  deductions  is  called 
the  ACCOUNT  SALES  (meaning  "an  account  of  sales").   Settlements  are  made 
periodically  on  the  portion  sold  up  to  the  end  of  a  fiscal  period,  or  after 
the  entire  lot  has  been  disposed  of,  depending  on  the  agreement  in  force. 

SELLING  PRICE — Often  the  selling  price  is  fixed  by  the  consignor,  and  if 
the  consignee  sells  for  less  there  must  be  some  special  reason  or  he  may  be 
held  liable  to  the  consignor  for  the  agreed  price.   In  other  cases,  as  in 
shipment  of  produce,  the  selling  price  cannot  be  fixed  by  the  consignor  but 
depends  on  daily  market  quotations  or  perhaps  even  on  prices  guaranteed  by  the 
consignee. 

DISTINCTION  BETWEEN  CONSIGNMENT  AND  SALE— When  the  price  has  been  fixed  or 
guaranteed,  it  would  seem  that  the  consignment  has  become  a  sale.   But  there 
is  always  a  legal,  and  usually  a  practical,  distinction.   In  a  sale,  ownership 
as  a  rule  passes  with  the  shipment  of  the  goods,  while  consigned  goods  remain 
in  the  shipper's  ownership  until  his  agent,  the  consignee,  has  sold  them.   The 
consignee  cannot  treat  the  merchandise  as  his  own;  i.e.,  he  cannot  dispose  of 
it  except  as  directed  by  the  consignor  and  cannot  make  it  a  security  for  his 
personal  debts,  etc.  A  second  distinction  has  already  been  indicated — the  man- 
ner of  payment.  A  consignment  usually  does  not  have  to  be  paid  for  until  the 
goods  are  sold,  while  goods  purchased  must  be  paid  for  whether  sold  or  not. 

A  consignee  who  guarantees  the  accounts  with  his  customers  is  said  to  be  a 
DEL  CREDERE  AGENT. 

ACCOUNT  SALES — The  following  is  a  typical  account  sales  rendered  by  a 
commission  merchant: 

0.  B.  FOX,  Consignee, 
Stencil  5476  in  account  with 

Lot  No.  87934  H.  W.  DUNNE,  Consignor 

GROSS  SALES — 40  boxes  celery  at  $1.15 
DEDUCT—Freight 
Cartage 

Storage  {1^   per  box  per  day  for  3  days) 
Discount 
Commission 

NET  PROCEEDS  (check  enclosed) 

Copyright,  1917,  The  Ronald  Press  Company 


April  4 

,  1917. 

$46.00 

$3.45 

.80 

1.20 

.92 

3.22 

9.59 

$36.41 

1-9-8 
DEDUCTIONS — Commission  is  usually  the  most  important  deduction  from  the 
amount  to  be  remitted  by  the  consignee  to  the  consignor.   Other  deductions 
commonly  include  freight,  drayage,  storage,  and  discount.   The  last-named  ex- 
pense refers  to  the  cash  discount  taken  by  the  customers  of  the  consignee. 
Thus,  if  the  terms  given  customers  are  2/10,  n/30,  the  consignee  may,  with  the 
•onsent  of  the  shipper,  deduct  2%   from  the  gross  sales  reported  in  order  to 
protect  himself  against  loss.   In  some  cases  a  part  of  the  selling  expenses 
may  be  deducted,  but  usually  the  commission  allowed  is  expected  to  cover  such 
expenses.   The  deductions  to  be  made  are  a  matter  of  agreement  between  the  two 
parties  before  the  shipment  is  made,  or  they  are  governed  by  trade  customs. 

CONSIGNMENTS-OUTWARD — The  term  "consignment"  if  used  alone  generally  re- 
fers to  a  "consignment-inward,"  while  a  "shipment"  refers  to  a  "consignment- 
outward."   To  avoid  confusion  it  is  best  to  use  the  terms  "consignments- in- 
ward" and  "consignments-outward."   A  discussion  of  consignments- inward  will  be 
found  in  I-ll-lO. 

When  a  consignment  is  shipped,  title  to  the  goods  remains  in  the  shipper. 
Legally,  the  goods  still  "belong"  to  him,  but  a  practical  consideration  of  the 
matter — namely,  that  the  goods  have  been  shipped  from  one  business  to  an- 
other— has  often  led  to  confusion  in  determining  what  accounts  should  be 
debited  and  credited  to  record  the  transaction.   It  would  not  seem  justifiable 
to  credit  sales  and  debit  a  customer's  account  when  there  is  no  sale  and  no 
customer.   A  simple  method  which  may  be  used  by  a  business  shipping  but  few 
consignments  is  illustrated  below.   This  method  makes  necessary  two  new  ledger 
accounts:  "Consignment  Stock  Outward"  and  "Profits  on  Consignments-Outward." 
For  the  purposes  of  illustration,  assume  that  the  celery  in  the  account  sales 
appearing  above  was  purchased  by  the  consignor,  H.  W.  Dunne,  at  a  cost  of  80 
cents  per  box — total  $32.   When  the  shipment  v;as  made  to  the  consignee  the 
following  entry  would  appear  in  the  journal: 

(1) 
-April  2,  1917- 

Consignment  Stock  Outward  $32.00 

To — Purchases  $32.00 

Shipment  to  0.  B.  Fox  of  40  boxes  celery  costing  80  cents  per  box. 

In  case  the  consignor  pays  freight  or  other  charges  on  the  consignment,  the 
amount  of  such  payments  is  debited  to  the  Consignment  Stock  Outward  account. 
When  the  net  proceeds  are  received  cash  will  be  debited  and  Consignment 
Stock  Outward  account  credited.   It  will  be  noted  that  the  ACTUAL  sales  price 
to  the  customer  of  the  consignee  is  not  taken  up  on  the  books  of  the  con- 
signor.  Neither  are  the  expenses  and  commission  deducted  by  the  consignee 
taken  into  the  accounts.   The  selling  price  to  the  consignor  is  the  net  pro- 
ceeds remitted  by  the  consignee,  viz.: 

(2) 
-April  4,  1917- 
Cash  $36.41 

To — Consignment  Stock  Outward  $36.41 

Net  Proceeds  in  full  on  shipment  made  on  April  2,  1917  to 
0.  B.  Fox.   (This  entry  will  appear  in  the  cash  book.) 

Copyright,  1917,  The  Ronald  Press  Company 


1-9-9 
As  each  consignment  is  closed,  or  at  the  end  of  the  month  or  fiscal 
period,  the  cost  of  the  consignments  closed  out  will  be  balanced  against  the 
sales,  and  the  difference  transferred  to  Profits  on  Consignments-Outward 
account.   The  latter  account  will  then  be  closed  into  Profit  and  Loss  when  the 
books  are  closed. 

(3) 
-April  4,  1917- 
Consignment  Stock  Outward  $4.41 

To — Profits  on  Consignments-Outward  $4.41 

To  transfer  profit  on  consignment -outward  sale. 

(4) 
-April  30,  1917- 
Profits  on  Consignments-Outward  4.41 

To — Profit  and  Loss  4.41 

To  transfer  profits  for  month  on  sales  of  consignment-outward. 

The  use  of  the  two  accounts  may  be  summed  up  in  the  following: 

CONSIGNMENT  STOCK  OUTWARD 
DEBIT  CREDIT 

With  cost  of  shipments  to  consignee  With  proceeds  from  all  consign- 
at  the  same  time  crediting  pur-  ments,  the  contra  debit  being 
chases  account.  cash  or  consignee's  personal  ac- 

Wlth  all  charges  paid  by  the  con-         count, 
signer  such  as  freight,  insurance, 
etc. 

At  the  end  of  a  fiscal  period,  or  as 
consignments  are  closed  out,  with 
the  net  profits  earned,  at  the  same 
time  crediting  Profits  on  Consign- 
ments-Outward. 

The  balance  of  this  account  shows  the  cost  to  date  of  all  consignments-out- 
ward not  closed  out,  and  will  appear  on  the  balance  sheet  with  merchandise 
inventory. 

PROFITS  ON  CONSIGNMENTS-OUTWARD 
DEBIT  CREDIT 

At  the  end  of  a  fiscal  period,  or  as 
the  consignments  are  closed  out, 
with  the  net  profits  earned,  at  the 
same  time  debiting  Consignment 
Stock  Outward. 

The  balcince  of  this  account  will  be  the  profit  or  loss  on  consignments-outward 
closed  out  during  the  period,  and  will  be  transferred  to  Profit  and  Loss  ac- 
count.  In  the  statement  of  profits  and  income  this  profit  or  loss  is  shown  as 
an  addition  to  or  deduction  from  gross  profit  from  sales,  since  it  is  olearly 
£in  operating  profit  or  loss. 

Copyright,  1917,  The  Ronald  Press  Company 


1-9-10 

A  consignments- outward  ledger  may  be  kept  in  case  the  number  of  shipments 
is  very  large.   This  might  consist  of  copies  of  invoices  sent  with  the  con- 
signments, and  all  charges  and  credits  would  be  entered  against  the  proper 
consignment.   At  the  end  of  the  month  or  fiscal  period  the  consignments  closed 
out  would  be  removed  from  the  ledger  and  proper  entries  made  debiting  or  cred- 
iting Profit  and  Loss  account.  A  controlling  account  is  provided  in  the  gen- 
eral ledger. 

Other  methods  of  handling  consignments- outward  may  be  used  depending  upon 
(1)  the  nature  of  the  business,  (2)  the  character  of  the  accounting  system, 
and  (3)  the  kind  of  data  desired  by  the  management. 


PROMISSORY  NOTES 

DEFINITION— COMMERCIAL  PAPER  is  divided  broadly  into  two  classes:  PROMIS- 
SORY NOTES  and  BILLS  OF  EXCHANGE.   The  latter  will  be  discussed  in  I-I2-8.   A 
promissory  note  is  defined  by  the  uniform  negotiable  instruments  act  as  "an 
unconditional  promise  in  writing,  made  by  one  person  to  another,  signed  by  the 
maker,  engaging  to  pay  on  demand,  or  at  a  fixed  or  determinable  future  time,  a 
sum  certain  in  money  to  order  or  to  the  bearer."   A  promissory  note  is  a  NOTE 
PAYABLE  to  the  person  issuing  it  and  a  NOTE  RECEIVABLE  to  anyone,  except  the 
maker,  receiving  it. 

PARTIES — There  are  two  parties  to  a  promissory  note:  the  MAKER  and  the 
PAYEE.   There  may  be  also  one  or  more  sureties  and  one  or  more  indorsers. 

ACCOUNTING  FOR  PROMISSORY  NOTES — It  is  unnecessary  to  maintain  a  separate 
record  where  only  a  few  notes  are  received  or  issued.   The  explanation  column 
in  the  Notes  Receivable  or  Notes  Payable  account  may  be  used  to  record  the  es- 
sential data  for  each  note.  Where  many  notes  are  handled,  a  notes  receivable 
register  and  a  notes  payable  register  are  necessary.   The  two  registers  are 
practically  alike  and  contain  columns  to  record  date  received  (or  issued)  ; 
date  of  note;  name  of  maker;  name  of  indorser  ;  where  payable;  time;  interest 
rate;  followed  by  twelve  columns  for  months  (the  day  on  which  the  note  matures 
being  entered  in  the  column  of  the  month  of  maturity)  ;  date  of  payment  ;  re- 
marks.  The  note  registers  may  be  used  as  books  of  original  entry,  or  may  be 
treated  as  subsidiary  ledgers,  with  a  controlling  account  in  the  general 
ledger. 

NOTES  RECEIVABLE  DISCOUNTED — The  indorsement  of  notes  which  are  discounted 
creates  a  liability  of  the  indorser  to  subsequent  holders,  known  as  a  CONTIN- 
GENT LIABILITY,   This  means  that  in  case  the  maker  of  the  note  fails  to  pay 
when  the  note  is  due,  the  liability  of  the  indorser  is  likely  to  become  a  real 
one.   For  that  reason  it  is  often  desirable  to  credit  the  receipts  from  dis- 
counted notes  to  a  NOTES  RECEIVABLE  DISCOUNTED  account  instead  of  Notes  Re- 
ceivable sftcount.   When  the  indorser  is  notified  of  the  payment  of  the  note, 
the  credit  is  transferred  to  the  Notes  Receivable  account.   The  following 
journal  entries  will  illustrate. 


Copyright,  1917,  The  Ronald  Press  Company 


1-9-11 

(1) 
-September  1- 

Notes  Receivable  $500.00 

To — J.  P.  Scott  $500.00 

To  record  receipt  of  30-day  non- interest-bearing 
note  in  settlement  of  his  account. 

(2) 
-September  15- 
Cash  498.75 

Interest  Prepaid  1.25 

To — Notes  Receivable  Discounted  500.00 

J.  P.  Scott's  30-day  non- interest-bearing  note 
discounted  at  6%. 

(3) 
-September  30- 
Notes  Receivable  Discounted  500,00 

To — Notes  Receivable  500.00 

J.  P.  Scott's  note  of  September  1,  paid  at  First 
National  Bank. 

Suppose,  however,  that  J.  P.  Scott  failed  to  pay  the  note  when  due  and 
that  the  indorser  was  forced  to  pay  the  amount  to  the  bank.   In  place  of  entry 
(3)  above  would  appear  the  following  entries: 

(3) 
-October  5- 
Notes  Receivable  Discounted  $500.00 

To — Cash  $500.00 

J.  P.  Scott's  30-day  note  protested. 

(4) 
-October  5- 
J.  P.  Scott  500.00 

To — Notes  Receivable  500.00 

To  charge  back  protested  note  to  customer's  account. 

In  case  there  were  protest  fees,  these  too  would  be  charged  to  the  custom- 
er's account. 

NOTES  RECEIVABLE  DISCOUNTED  ON  THE  BALANCE  SHEET— There  are  four  methods 
in  common  use  for  handling  discounted  notes  on  the  balance  sheet: 

1.  Among  current  assets: 

Notes  Receivable  $7,600.00 

Less — Notes  Receivable  Discounted    1,900.00  $5,700.00 


2.  Among  current  liabilities  similar  to  other  current  liabilities. 
(Notes  Receivable  would  appear  at  the  gross  figure,  $7,600.) 

Copyright,  1917,  The  Ronald  Press  Company 


1-9-12 
3«  Among  current  liabilities  but  "carried  short:" 

Notes  Receivable  Discounted  $1,900.00 


The  amount  would  not  be  extended  and  consequently  would  not  appear 
in  the  total  of  current  liabilities.   (Notes  Receivable  would  ap- 
pear at  the  net  figure,  $5,700.) 

4.  As  a  footnote  to  the  balance  sheet.   (Notes  Receivable  would  appear 
at  the  net  figure,  $5,700.) 

Method  No.  2  would  ordinarily  be  used  only  where  there  is  some  likelihood  that 
the  discounted  notes  would  not  be  met  by  the  makers. 

REFERENCES : 

Cole,  pages  381-4 

Oilman,  pages  165-6;  200-202 

Esquerre,  pages  208-220;  158-163 

Greendlinger  and  Schulze,  pages  356,  357,  360-362 


Copyright,  1917,  The  Ronald  Press  Company 


I-lO-l 


COMPLETE  ACCOUNTING  COURSE— PART  I 


Lecture  10 


JOINT  VENTURES;  ACCRUING  INCOME  AND  EXPENSE;  DEFERRED  CHARGES  AND  CREDITS 

Problem  8 

Plant  4  Co.  and  Edwards  4  Co.  ship  merchandise  to  South  America  on  joint 
account.   Edwards  &  Co.  give  Plant  &  Co.  $1,200  in  cash  and  their  note  for 
33,000  in  lieu  of  cash.  Plant  &  Co.  are  to  provide  the  balance  of  cash  re- 
quired, to  manage  the  venture,  and  to  receive  a  commission  of  2%  on  amount  of 
invoice  for  merchandise.  Profits  to  be  divided  equally. 

Plant  k   Co.  paid  Smith  &  Greer  $5,000  for  merchandise  and  discounted  Ed- 
wards &  Co.'s  note  of  $3,000  at  a  cost  of  $60.   Plant  &  Co.  prepaid  freight 
$420,  insurance  $60.   In  due  time  Plant  &  Co.  received  from  South  America  an 
account  sales  and  a  draft  for  the  net  proceeds,  payable  in  London  for  $3,200, 
out  of  which  Plant  &  Co.  paid  $3,000  to  retire  the  note  of  Edwards  &  Co. 

Later  Plant  &  Co.  received  draft  for  $3,100,  being  balance  of  proceeds  of 
sale  of  merchEindise.   The  joint  accoimt  with  Edwards  &  Co.  was  closed  and  a 
check  for  the  balance  due  was  paid  to  Edwards  &  Co. 

Prepare  statement  showing  details  of  the  joint  account,  also  a  statement 
of  Edwards  k   Co.'s  account. 


Problem  9 

The  following  comprise  the  nominal  accounts 
October  31,  1917: 

Rent 

Taxes 

Salaries 

Insurance  Expired 

Heating  and  Lighting 

Inventory — Silks,  November  1,  1916 

Purchases — Silks 

Freight-In~Silks 

Inventory — Linens,  November  1,  1916 

Purchases — Linens 

Freight-Out — Linens 

Allowances  and  Returns — Silks 

Allowances  and  Returns — Linens 

Discounts  on  Sales— Linens 

Interest  paid 

Sales — Silks 
'         Sales — Linens 
» 

«   The  inventories  on  October  31,  1917,  are  silks 
the  same  date  unpaid  invoices  amount  to  $2,515, 


of  the  Empire  Trading  Co.  at 


DEBITS 

$1,650.00 

2,200.00 

11,675.00 

1,180.00 

3,540.00 

18,140.00 

57,165.00 

1,798.00 

22,900.00 

44,462.00 

1,520.00 

2,970.00 

2,515.00 

4,115.00 

575.00 


CREDITS 


$82,476.00 
85,144.00 


$19,475,  and  linens  $8,460.   On 
and  are  classified  as  follows: 


Copyright,  1917,  The  Ronald  Press  Company 


1-10-2 


Purchases — Silks 

Rent 

Insurance  (of  which  |135  has  expired) 

Total 


$2,145.00 
150.00 
220.00 

$2,515.00 


Neither  taxes  accrued  $200,  nor  accrued  interest  on  notes  payable  $140,  have 
been  taken  up  on  the  books.   Formulate  the  entries  necessary  to  adjust  and 
close  the  books  of  the  concern  on  October  31,  1917. 

MISCELLANEOUS  QUESTIONS 

Question  25 — The  Acme  Club  initiates  new  members  on  January  1,  April  1, 
July  1,  and  October  1  of  each  year  and  dues  for  one  year  in  advance  are  pay- 
able on  the  day  of  initiation.   On  the  liability  side  of  the  balance  sheet 
prepared  December  31,  1916,  appears  the  following  item:   "Membership  Dues  Un- 
earned, $7,172.50."   During  the  year  1917  entries  were  made  charging  members' 
accounts  and  crediting  "Income  from  Membership  Dues"  as  follows:   January  1, 
$8,750;  April  1,  $6,100;  July  1,  $2,550;  October  1,  $6,400.   What  adjusting 
entries  must  be  made  on  December  31,  1917,  to  state  properly  the  gross  income 
from  membership  dues  for  the  fiscal  year  ending  that  date? 

Question  26 — 

(a)  What  is  the  due  date  of  the  note  appearing  in  Question  24? 

(b)  Of  a  note  dated  January  7  and  due  "three  months  from  date"?  • 

(c)  Should  the  360-  or  365-day  year  be  used  in  interest  calculations? 


WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

Close  and  post  the  books  of  original  entry.   Be  sure  all  individual  post- 
ings have  been  made.   Then  prepare  a  schedule  of  customers  and  creditors 
ledger  accounts,  the  totals  of  which  should  agree  with  the  respective  con- 
trolling accounts.   Prepare  and  submit  trial  balance  of  the  general  ledger. 

Financial  statements  will  not  be  prepared  at  March  31,  and  the  nominal 
accounts  will  not  be  closed  until  April  30. 

Solution  to  Problem  6  Exhibit  i 


ASSETS 
CURRENT  ASSETS: 

Cash  $2,360.00 

Petty  Cash  Fund   100.00 


Notes  Receivable 
Accounts  Receivable 
Inv. — Merch.   $11,400.00 
Sundry  Supp.     400.00 


Total  Current  Assets 
CAPITAL  ASSETS: 

Land  $5,000.00 

Buildings      16,000.00 
Office  Fixtures  4,600.00 


Total  All  Assets 


WAHR  AND 

COOK 

[CE  SHEET,  DECEMBER  31,  1917 

LIABILITIES  AND  CAPITAL 

CURRENT  LIABILITIES: 

Accounts  Payable 

$15,970.00 

$2,460.00 

Bank  Loans 

5,400.00 

Salaries  Unpaid 

230.00 

660.00 
27,940.00 

Total  Current  Liab. 

$21,600.00 

MORTGAGE 

10,000.00 

11,800.00 

CAPITAL  ACCOUNTS: 
(Details  in 

$42,860.00 

Exhibit  C) 

Wahr         $23,145.00 

Cook          13,715.00 

36,860.00 

25,600.00 

Total  Liabilities 
and  Capital 

$68,460.00 

$68,460.00 

Copyright,  1917,  The  Ronald  Press  Company 


WAHR  AND  COOK 

STATEMENT  OF  PROFITS  AND  INCOME 

YEAR  ENDING  DECEMBER  31,  1917 


Particulars 
GROSS  SALES 

Deduct — Return  Sales 

Allowances  on  Sales 
Freight-Out 

NET  SALES 

COST  OF  MERCHANDISE  SOLD: 

Inventory,  January  1,  1917 
Purchases  $46,000.00 

Freight-In  1,400.00 


Return  Purchases 


$47,400.00 
600.00 


Inventory,  December  31,  1917 

GROSS  PROFIT  FROM  SALES 
SELLING  AND  GENERAL  EXPENSES: 

Clerks'  Salaries 

Advertising 

Trimming  and  Decorating 

Office  Expenses 

Heat  and  Light 

Taxes 

Miscellaneous  Expenses 

Partners*  Salaries 

Total 

NET  LOSS  FROM  OPERATION 

Deduct — Discounts  on  Purchases 


Add — Interest  Paid 

Discounts  on  Sales 

NET  LOSS  carried  to  Proprietors'  accounts 

Distributed  as  follows: 
Wahr  % 
Cook  % 

Total 


$2,500.00 

1,300.00 

200.00 


$12,800.00 


46,800.00 


1-10-3 
Exhibit  B 


Per- 
Amount     centage 
$68,000.00    106.3% 


4,000.00 


6.3 


$64,000.00    100.0 


$59,600.00 
11,400.00 

48,200.00 

75.3 

$15,800.00 
23,740.00 

24,7 

$6,230.00 

1,475.00 

450.00 

1,000.00 

640.00 

240.00 

4,705.00 

9,000.00 

9.7 
2.3 

.7 
1.6 
1.0 

.4 
7.4 

14.0 

37.1 

$7,940.00 
300.00 

12.4 
.4 

$860.00 
640.00 

$7,640.00 
1,500.00 

12.0 
2.3 

$9,140.00 

14.3 

$6,855.00 
2,285.00 

$9,140.00 

Copyright,  1917,  The  Ronald  Press  Company 


WAHR  AND  COOK 
STATEMENT  OF  PARTNERS*  CAPITAL  ACCOUNTS 
DECEMBER  31,  1917 


Balance,  January  1,  1917 
Salary  for  year 


Loss  for  year  as  above 

Withdrawals  during  year 

Balance,  December  31,  1917  (Exhibit  A) 


WAHR 
$30,000.00 
2,000.00 

$32,000.00 
6,855.00 

$25,145.00 
2,000.00 


COOK 
$10,000.00 
7,000.00 

$17,000.00 
2,285.00 

$14,715.00 
1,000.00 


1-10-4 

Exhibit  C 


TOGETHER 
$40,000.00 
9,000.00 

$49,000.00 
9,140.00 

$39,860.00 
3,000.00 


$23,145.00   $13,715.00   $36,860.00 


JOURNAL  ENTRIES  TO  CLOSE  THE  BOOKS 
OF  WAHR  AND  COOK,  DECEMBER  31,  1917 

(1) 
Clerks »  Salaries  $230.00 

Advertising  75.00 

Heat  and  Light  90.00 

Miscellaneous  Expense  205.00 

To— Salaries  Unpaid  $230.00 

Accounts  Payable  370.00 

To  record  liabilities  not  taken  up* on  books. 

(2) 
Sundry  Supplies  400.00 

To—Office  Expenses  200.00 

Heat  and  Light  50.00 

Trimming  and  Decorating  150.00 

To  take  up  inventory  of  sundry  supplies. 

(3) 
Partners*  Salaries  9,000.00 

To — ^Cook — Drawing  Account  7,000.00 

Wahr — Drawing  Account  2,000.00 

To-  set  up  partners*  salaries  as  per  partnership 
agreement. 


Copyright,  1917,  The  Ronald  Press  Company 


(4) 


1-10-5 


Cost  of  Sales  Account 

To — Inventory  of  Merchandise 
To  record  decrease  in  merchandise  inventory  as 
follows: 

January  1,  1917  $12,800.00 

December  31,  1917  11,400.00 


$1,400.00 


Decrease 


$1,400.00 


$1,400.00 


(5) 

Sales 

To — Return  Sales 

Allowances  on  Sales 
Freight-Out 
To  transfer  deductions  from  sales  to  sales  ac- 
count. 


4,000.00 


2,500.00 

1,300.00 

200.00 


(6) 

Purchases 
Return  Purchases 
To — Freight-In 
To  transfer  to  Purchases  account  deductions  and 
additions  thereto. 


800.00 
600.00 


1,400.00 


Cost  of  Sales  Account 
To — Purchases 
To  transfer  net  purchases. 


(7) 


46,800.00 


46,800.00 


(8) 
Sales  64,000.00 

To~Cost  of  Sales  account 
Profit  and  Loss 
To  transfer  gross  profit  to  Profit  and  Loss  account. 


48,200.00 
15,800.00 


(9) 
Profit  and  Loss 

To — Clerks'  Salaries 
Advertising 

Trimming  and  Decorating 
Office  Expenses 
Heat  and  Light 
Taxes 

Miscellaneous  Expenses 
Partners*  Salaries 
To  transfer  expense  accounts  to  Profit  and  Loss 
account. 


23,740.00 


6,230.00 

1,475.00 

450.00 

1,000.00 

640.00 

240.00 

4,705.00 

9,000.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-10-6 


(10) 
Discounts  on  Purchases 
To — Profit  and  Loss 
To  transfer  miscellaneous  income. 

(11) 
Profit  and  Loss 

To — Interest  Paid 

Discounts  on  Sales 
To  transfer  non-operating  expenses. 


$300.00 


1,500.00 


$300.00 


860.00 
640.00 


(12) 


Wahr — Drawing  Account 
Cook — Drawing  Account 
To — Profit  and  Loss 


6,855.00 
2,285.00 


9,140.00 


To  transfer  net  loss  for  year  to  drawing  accounts. 


(13) 


Wahr — Capital  Account 
Cook — Drawing  Account 

To — Wahr — Drawing  Account 
Cook — Capital  Account 


6,855.00 
3,715.00 


6,855.00 
3,715.00 


To  transfer  balances  of  drawing  accounts  to  capital  accounts. 

ANSWERS  TO  QUESTIONS 
Answer  to  Question  20 — An  adjusting  journal  entry  should  have  been  made 
crediting  the  working  fund  with  the  amount  of  the  salesman's  expense  report 
and  debiting  the  proper  selling  expense  account,  thus: 

Salesman's  Traveling  Expenses  $195.00 

To — Advances  to  Salesman  $195.00 

To  take  up  expense  report  of  , 

dated  December  31,  1917. 
The  effect  of  not  making  this  adjusting  entry  would  be  to  overstate  both 
assets  and  profits.   The  entry  having  been  made.  Advances  to  Salesman  will 
appear  as  $55  on  the  balance  sheet. 

Answer  to  Question  21 — All  mail  is  opened  in  the  mailing  department  for 
distribution  purposes.   If  a  remittance  is  enclosed,  the  amount  thereof  is 
noted  on  the  envelope  and  the  envelope  together  with  the  remittance  is  sent  to 
the  cashier's  office.   The  letter  is  sent  to  the  proper  correspondent  for 
acknowledgment.   The  cashier  writes  up  his  cash  book  directly  from  the  remit- 
tances and  deposits  intact  the  entire  receipts  for  the  day.   The  cash  receipts 
are  posted  by  the  ledger-keepers.   The  ledger-keepers  have  no  access  to  the 
cashier's  cage,  nor  has  the  cashier  access  to  the  ledgers. 

A  further  development  involves  the  preparation  by  the  mail  department  of 
an  itemized  list  of  remittances  received  showing  name,  address,  amount,  etc. 
The  original  is  sent  to  the  cashier  with  the  remittances  and  will  be  used  as 
the  basis  for  the  cash  book  entries.   The  duplicate  is  sent  to  the  general 
bookkeeper  and  may  be  used  to  check  the  daily  bank  deposit.   The  triplicate  is 
retained  in  the  mail  department  as  a  record  of  the  items  there  received  and 
forwarded  to  the  cashier. 


Copyright,  1917,  The  Ronald  Press  Company 


1-10-7 
JOINT  VENTURES 

A  joint  venture  has  already  been  referred  to  as  a  special  partnership;  it 
is  a  temporary  partnership  formed  for  the  purpose  of  dividing  the  risk  of 
selling  a  particular  lot  of  goods,  as  where  shipment  is  made  to  a  distant 
point.   The  shipment  is  often  a  consignment.   Thus,  A  is  a  dealer  known  to  B 
but  unknown  to  C  and  desires  to  obtain  a  certain  lot  of  goods  from  C.   B 
arranges  with  C  to  send  the  merchandise  to  A  on  JOINT  ACCOUNT,  he  (B)  agreeing 
to  collect  the  proceeds  when  the  goods  are  sold.   B  and  C  are  called  the 
VENTURERS  or  ADVENTURERS,  and  A  the  consignee.   An  agreed  rate  of  interest  may 
be  allowed  or  charged  as  between  the  adventurers  on  all  amounts  advanced  or 
received  up  to  the  date  of  settlement.  Profits  or  losses  are  computed  in  the 
ordinary  way,  the  basis  of  division  depending  on  agreement. 

The  accounts  of  the  venture  are  kept  on  the  books  of  one  of  the  venturers 
called  the  MANAGER.  A  Joint  Venture  accoimt  is  debited  with  all  advances  and 
credited  with  all  receipts  applicable  to  the  venture.   If  others  of  the  ven- 
turers make  advances  or  take  over  part  of  the  receipts,  personal  accounts 
should  be  opened  with  them  on  the  books  of  the  manager  in  order  to  show  the 
proper  amounts  as  contra  entries  in  the  Joint  Venture  account.  When  the 
transactions  concerning  the  venture  have  been  completed,  immediate  settlement 
is  made  and  Venture  account  and  personal  accounts  with  venturers  closed  out. 

ACCRUING  INCOME  AND  EXPENSE 

Before  a  statement  of  profit  and  loss  and  a  balance  sheet  are  prepared, 
care  should  be  taken  to  see  that  all  assets  and  liabilities  and  all  income  and 
expense  appear  on  the  books.   Items  such  as  wages,  rent,  royalties,  interest, 
taxes  (income  and  property  taxes),  etc.,  should  be  ACCRUED,  i.e.,  set  up  on 
the  books  whether  receivable  or  payable,  and  whether  due  or  not  due.   The 
necessary  journal  entries  may  be  described  as  follows:  (1)  for  accruing  in- 
come, debit  an  Accruing  Asset  account  and  credit  an  Income  account;  (2)  for 
accruing  expense,  debit  an  Expense  account  and  credit  an  Accruing  Liability 
account.   The  fact  that  such  assets  and  liabilities  may  not  be  receivable  or 
payable  until  some  future  time  does  not  alter  the  necessity  for  stating  prop- 
erly the  income  and  expense  of  the  period  under  review  and  of  indicating  the 
correct  financial  position  at  a  certain  date. 

ACCRUED  INTEREST  ON  NOTES  RECEIVABLE— This  item  is  an  asset  appearing  on 
the  balance  sheet,  sometimes  following  Notes  Receivable.   To  ascertain  the 
amount  of  interest  accrued,  the  notes  on  the  notes  receivable  register  should 
be  examined  and  the  interest  on  each  note  computed  up  to  the  date  of  the  bal- 
ance sheet.   If  the  accrued  interest  is  found  to  be,  say,  $650,  the  following 
Journal  entry  may  be  made: 

-December  31,  1916- 
Accrued  Interest  on  Notes  Receivable  $650.00 

To — Interest  Received  (or  Earned)  $650.00 

To  take  up  interest  accrued  to  December  31,1916,  as  per  schedule. 
The  account  credited  is  termed  Interest  Received  or  Interest  Earned.   It  is 
usually  unnecessary  to  distinguish  between  interest  actually  received  and 
interest  merely  accrued.   In  the  ordinary  course  of  business  transactions  the 
accrued  income  will  soon  be  realized  and  need  not  therefore  be  brought  out 
separately. 

Copyright,  1917,  The  Ronald  Press  Company 


1-10-8 
After  the  accrued  interest  has  been  set  up  on  the  ledger  it  is  of  im- 
portance to  see  how  the  account  will  be  handled  during  the  following  account- 
ing period.   Two  methods  are  in  common  use. 

1.  At  the  end  of  each  month  the  notes  receivable  should  be  examined  for 
the  purpose  of  ascertaining  the  amount  of  interest  accrued  thereon  during  that 
month,  whether  such  interest  has  been  paid  out  or  not.   Thus,  during  January, 
1917,  if  interest  has  accrued  to  the  amount  of  $875,  a  journal  entry  debiting 
Accrued  Interest  and  crediting  Interest  Earned  will  be  made: 

-January  31,  1917- 
Interest  Accrued  on  Notes  Receivable  $875.00 

To — Interest  Earned  $875.00 

To  record  interest  earned  during  January  as  per  schedule. 

Assume  that  during  the  month  $800  in  payment  of  interest  has  been  received. 

Cash  $800.00 

To — Interest  Accrued  on  Notes  Receivable  $800.00 

(The  entry  will  be  made  through  the  cash  book  when 
the  interest  is  received. ) 
If  the  interest  accrued  at  the  beginning  of  the  month  was  $650,  the  balance 
of  the  account  will  stand  at  $725,  which  should  be  the  amount  accrued  and  out- 
standing at  January  31. 

INTEREST  ACCRUED  ON  NOTES  RECEIVABLE 
DEBIT  WITH  CREDIT  WITH 

Interest  accrued  and  outstanding  at      Interest  paid,  at  the  same  time 

beginning  of  month.  debiting  cash. 

Interest  earned  during  each  month,  at 
the  same  time  crediting  Interest 
Earned  (a  profit  and  loss  accoimt). 
The  balance  of  the  account  is  an  asset,  being  the  interest  accrued  and  out- 
standing at  the  end  of  the  period. 

The  Interest  Received  or  Interest  Earned  account  will  contain  but  one 
entry  (a  credit  corresponding  to  the  second  debit  in  the  Interest  Accrued  ac- 
count), and  will  be  an  Income  account  to  be  closed  into  Profit  and  Loss. 

2.  The  first  method  rests  on  the  theory  that  all  interest  on  notes  receiv- 
able when  paid  has  been  previously  accrued  and  is  therefore  to  be  posted  from 
the  cash  book  to  the  credit  of  the  Interest  Accrued  account  even  though  the 
accrued  interest  will  not  be  set  up  on  the  books  until  the  end  of  the  month. 

A  second  method  treats  all  interest  received  as  income,  adjustments  to  be  made 
at  the  end  of  the  month  or  period.   The  three  entries  described  above  will  be 
altered  as  follows: 

(1) 
-January  31,  1917- 
Cash  $800.00 

To — Interest  Received  -►  $800.00 

(This  entry  will  be  made  in  the  cash  book  whenever 
the  interest  is  received, ) 

Copyright,  1917,  The  Ronald  Press  Company 


1-10-9 
(2) 
Interest  Received  $650.00 

To — Interest  Accrued  on  Notes  Receivable  $650.00 

To  reverse  entry  made  on  December  31,  1916.  (This 
reversing  entry  may  have  been  made  on  January  1, 
1917.) 

(3) 
Interest  Accrued  on  Notes  Receivable  725.00 

To — Interest  Received  725.00 

To  take  up  interest  accrued  at  January  31,  1917. 

(4) 
Interest  Received  875.00 

To — Profit  and  Loss  875.00 

To  close  out  interest  earned  during  January. 

INTEREST  ACCRUED  ON  NOTES  RECEIVABLE 

DEBIT  WITH  CREDIT  WITH 

Interest  accrued  and  outstanding  at  The  amount  of  the  interest  accrued 

beginning  of  period.  and  outstanding  at  the  beginning 

Interest  accrued  and  outstanding  at  of  the  period,  at  the  same  time 

end  of  period,  at  the  same  time  debiting  Interest  Received, 
crediting  Interest  Received. 

The  balance  of  the  account  is  the  interest  accrued  and  outstanding  at  the  end 
of  the  period  and  is  an  asset. 

INTEREST  RECEIVED 

DEBIT  WITH  CREDIT  WITH 

At  the  end  of  the  period  the  amount  Receipts  of  interest,  at  the  same 

of  interest  accrued  and  outstand-  time  debiting  cash, 

ing  at  the  beginning  of  the  pe-  Interest  accrued  and  outstanding  at 

riod,  at  the  same  time  crediting  end  of  period,  at  the  same  time 

Interest  Accrued.  debiting  Interest  Accrued. 

The  balance  of  the  account  is  the  interest  earned  during  the  period  (a  credit) 
and  will  be  closed  out  to  Profit  and  Loss. 

INTEREST  ACCRUED  ON  NOTES  PAYABLE — What  has  been  said  concerning  interest 
accruing  on  notes  receivable  applies  as  well  to  interest  accruing  on  notes 
payable,  the  situation  being,  of  course,  reversed.   Either  method  described 
above  may  be  used,  the  accounts  involved  being  Interest  Paid  (or  Interest  Ex- 
pense) and  Interest  Accrued  on  Notes  Payable. 

WAGES  ACCRUED — Accrued  wages  are  usually  definitely  ascertainable  and  may 
be  put  on  the  books  of  account  by  debiting  Wages  and  crediting  Wages  Accrued, 
the  latter  appearing  on  the  balance  sheet  as  a  current  liability.   On  the  first 
day  of  the  period  following,  the  entry  may  be  reversed,  as  in  the  case  of 
Method  2.   Or,  following  the"  first  method,  all  payments  to  wages  may  be  re- 
garded as  the  payment  of  a  liability  already  accrued  and  thus  debited  to  Wages 
Accrued  account. 

Copyright,  1917,  The  Ronald  Press  Company 


I-IO-IO 
TAXES  ACCRUED — In  handling  taxes,  the  first  of  the  two  methods  siiggested 
is  nearly  always  used.   Taxes  are  looked  upon  as  accruing  from  month  to  month, 
although  paid  usually  but  once  a  year.   At  the  end  of  each  month  or  other  ac- 
counting period.  Taxes  account  is  debited  and  Taxes  Accrued  account  is  cred- 
ited with  the  amount  estimated  to  apply  to  that  period.  Both  property  and  in- 
come taxes  should  be  accrued,  the  former  being  computed  on  the  basis  of  last 
year's  taxes  or  other  information  available,  and  the  latter  on  the  basis  of 
the  income  for  the  period. 

In  the  case  of  property  taxes,  the  rate  being  subject  to  change  each  year, 
the  exact  amount  to  be  accrued  each  month  cannot  be  ascertained.   In  this  re- 
spect taxes  differ  from  other  accruing  items  described.   Unless  other  informa- 
tion is  available,  the  best  plan  is  to  set  up  the  liability  on  the  basis  of 
the  previous  year's  taxes  and  if  the  actual  assessment  differs  from  the  lia- 
bility thus  provided,  the  difference,  if  small,  may  be  absorbed  in  the  ex- 
penses of  the  last  month  of  the  fiscal  period.   If  the  difference  is  a  large 
one,  the  Profit  and  Loss  account  of  the  period  to  which  the  taxes  apply  may 
have  to  be  adjusted. 

TAXES  ACCRUED 
DEBIT  WITH  CREDIT  WITH 

Taxes  paid,  at  the  same  time  credit-     Monthly  proportion  of  estimated  ac- 
ing  cash.  cruing  taxes,  at  the  same  time 

debiting  Taxes  (a  nominal  ac- 
count) . 

The  balance  of  the  account  is  a  credit  and  represents  the  taxes  accrued  and 
unpaid  at  the  end  of  each  monthly  period. 

The  Taxes  account  is  an  expense  account  which  will  be  debited  monthly  with 
the  proportion  of  estimated  taxes  applicable  thereto  (at  the  same  time  credit- 
ing Taxes  Accrued),  and  will  be  closed  out  to  Profit  and  Loss. 

DEFERRED  CHARGES  TO  EXPENSE  AND  DEFERRED  CREDITS  TO  INCOME 

The  preceding  paragraphs  describing  accrued  income  and  expenses  may  be 
contrasted  with  the  following  discussion  of  DEFERRED  CHARGES  and  DEFERRED 
CREDITS.   Both  have  to  do  with  cash  receipts  on  account  of  income  and  cash 
payments  on  accoimt  of  expense  which  lie  outside  the  fiscal  period  under  re- 
view.  In  the  case  of  accrued  items  the  cash  receipt  or  cash  payment  will  be 
made  in  the  future  ;  in  the  case  of  deferred  items  the  cash  receipt  or  cash 
payment  has  been  made  in  the  past.  Moreover,  both  have  the  same  purpose:  to 
facilitate  the  preparation  of  a  correct  statement  of  financial  position  and  of 
profits. 

Illustrations  of  Deferred  Charges  are:  (1)  prepayments  of  various  ex- 
penses, such  as  interest,  rent,  insurance,  advertising,  taxes,  etc.;  (2)  dis- 
counts sustained  on  securities  issued;  and  (3)  extraordinary  losses  or  other 
expenses  which  may  not  be  of  benefit  to  future  periods,  but  which  are  of  such 
a  nature  that  to  carry  them  at  once  to  profit  and  loss  might  unduly  depress 
the  current  earnings,  such  as  extraordinary  repairs  where  no  depreciation  has 
been  provided,  or  flood  expenses.   Classes  (2)  and  (3)  will  be  taken  up  later. 

Copyright,  1917,  The  Ronald  Press  Company 


I-lO-ll 

PREPAID  INTEREST — When  notes  receivable  are  discounted,  the  discount  sus- 
tained is  really  prepaid  interest,  which  should  be  spread  over  the  term  of  the 
note.   It  is  usual,  therefore,  to  debit  an  asset  account.  Prepaid  Interest  on 
Notes  Receivable  Discounted,  at  the  time  the  notes  are  discounted.  When  the 
books  are  closed,  only  that  amount  applying  to  the  period  subsequent  to  the 
closing  date  should  be  left  in  the  account,  the  balance  being  carried  to 
Profit  and  Loss  through  the  medium  of  the  Interest  Paid  account. 

(1) 
-October  1,  1917- 

Cash  $  970.00 

Prepaid  Interest  30.00 

To — Notes  Receivable  Discounted  $1,000.00 

To  record  discounting  of  Geo.  Smith's  six 
months'  non-interest-bearing  note  dated 
October  1,  discount  rate  6%. 

(2) 
-December  31,  1917- 
Interest  Paid  15.00 

To — Interest  Prepaid  15.00 

To  transfer  portion  of  prepaid  interest  expired. 

PREPAID  INSURANCE — The  premium  on  insurance  is  paid  in  advance  and  may 
therefore  be  debited  at  once  to  an  asset  account,  Prepaid  Insurance.  Where  a 
large  number  of  policies  are  held,  it  is  convenient  to  keep  a  memorandum  rec- 
ord of  each  premium  paid  in  what  is  called  an  "insurance  register."   If  the 
books  are  closed  monthly,  a  separate  money  column  is  provided  for  each  month 
so  that  the  amount  expiring  during  each  month  may  be  ascertained  for  the  pur- 
pose of  making  a  journal  entry,  crediting  Prepaid  Insurance  and  debiting  In- 
surance (a  profit  and  loss  account). 

DEFERRED  CHARGES  ON  Tiffi  BALANCE  SHEET— Prepaid  expenses  are  sometimes  in- 
cluded under  the  caption  of  WORKING  ASSETS,  representing  expenditures  neces- 
sarily incident  to  the  earning  of  future  income.   For  the  present  they  may  be 
shown  under  a  separate  caption,  "Prepaid  Expenses,"  following  current  assets. 

DEFERRED  CREDITS  TO  INCOME— In  the  ordinary  trading  or  manufacturing  busi- 
ness, deferred  credits  are  uncommon,  A  club  may  have  a  deferred  credit  ap- 
pearing on  its  balance  sheet  consisting  of  dues  paid  in  advance.   Other  illus- 
trations are  Subscriptions  Unearned  in  the  case  of  newspapers  eind  magazines 
and  Prepaid  Water  Rentals  in  the  case  of  waterworks.   In  any  case  a  deferred 
credit  is  treated  similar  to  a  deferred  charge  ;  carried  on  the  balance  sheet 
as  a  separate  item  following  current  liabilities,  and  written  off  to  the 
credit  of  Profit  and  Loss  when  earned. 

REFERENCES : 

Cole,  pages  42-45 

Esquerre,  pages,  315-316;  363-368 

Greendlinger  and  Schulze 


Copyright,  1917,  Tho  Ronald  Press  Company 


I-ll-l 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  11 

CONSIGNMENTS-INWARD 


Problem  10 


The  balance  sheet  of  A.  R.  Miles  and  Co.,  commission  merchants,  on  October 
1,  1917,  was  as  follows: 


ASSETS 
CURRENT  ASSETS: 

Cash  $14,167.40 
Accounts  Rec.  8,488.23 
Advances  on 

Consignments   3,176.14  $25,831.77 


PREPAID  EXPENSE: 
Insurance 


LIABILITIES 
CURRENT  LIABILITIES: 
Freight  un- 

.  paid       $    86.20 
Due  on  Con- 
signments 
not  closed 
out 


2,787.96  $  2,874.16 


485.00 


CAPITAL  ASSETS: 

Furniture  and  Fixtures 


2,000.00 


$28,316.77 


CAPITAL  ACCOUNT: 
Balance,  Sept. 

1,  1917     $24,347.80 
Profits  for 

September 

(including 

$476.49  a 

gross  profit 

on  consign- 
ments not 

closed  out) 


1,094.81   25,442.61 


$28,316.77 


The  consignments- inward  ledger  contained  the  following  details  at  October 
1,  1917: 


CONSIGNMENT  ADVANCES 

NUMBER  FREIGHT  DRAYAGE  DRAFTS 

1196  $34.50  $  5.25  $4,000.00 

1200  19.40    4.00  

1201  7.25    3.50  1,000.00 
1204  10.10    2.00    500.00 


COMMISSION     TOTAL  OF 
EARNED     ADVANCES  AND 
RATE  AMOUNT   COMMISSION 


5%  $  68.52 

10%  254.70 

10%  63.60 

8%  89.67 


$4,108.27 

278.10 

1,074.35 

601.77 


SALES 

$1,370.50 

2,547.00 

635.98 

1,120.83 


$71.25  $14.75  $5,500.00    $476.49   $6,062.49   $5,674.31 


Copyright,  1917,  The  Ronald  Press  Company 


1-11-2 
On  October  31,  1917  the  only  consignment  not  closed  out  was  No,  1196. 
During  the  month  additional  sales  of  $4,451  were  made  from  this  consignment 
but  no  further  advances  were  made  thereon. 

Duplicate  invoices  are  the  only  records  kept  of  sales  to  customers,  and  as 
these  are  paid  promptly  and  individually,  there  is  no  need  for  a  customers 
ledger.   There  is  also  no  general  ledger. 

The  following  consignments  were  handled  and  closed  out  during  October, 
settlements  being  made  in  cash,  the  information  being  taken  from  the  consign- 
ment sheets  filed  away  during  the  month. 


COMMISSION 

CONSIGNMENT 

ADVANCES 

DEDUCTED 

NET 

NUMBER 

FREIGHT 

DRAYAGE  DRAFTS 

RATE   AMOUNT 

PROCEEDS 

SALES 

1200 

$19.40 

$  4.00  $  

10%  $  674.65 

$  6,048.45 

$  6,746.50 

1201 

7.25 

3.50  1,000.00 

10%    167.42 

496.03 

1,674.20 

1204 

10.10 

2.00    500*00 

8%    199.00 

1,776.46 

2,487.56 

1205 

16.70 

2.50    

5%     75.00 

1,405.80 

1,500.00 

1206 

7.56 

3.00    750.00 

10%    214.48 

1,169.76 

2,144.80 

1207 

18.80 

6.50  2,000.00 

5%    424.89 

6,046.56 

8,496.75 

$79.81 

$21.50  $4,250.00 

$1,755.44 

$16,943.06 

$23,049.81 

Receipts  during  the  month  consisted  entirely  of  payments  by  customers  on 
account  and  totaled  $21,475.75;  while  disbursements  were  made  up  of  freight 
$102. 90  J  drayage  $12.00;  drafts  $2,750.00;  net  proceeds  $16,943.06;  salaries 
$575.00;  rent  $200.00;  unexpired  insurance  $166.00;  general  expense  $134.50. 

On  October  31,  1917,  there  were  accounts  payable  of  $125.40;  consisting  of 
freight  bills  $26.36,  and  general  expense  bills  $99.04.   Insurance  that  ex- 
pired during  the  month  amounted  to  $65. 

From  the  foregoing  information  prepare  a  balance  sheet  at  October  31, 
1917,  and  a  statement  of  profit  and  loss  for  the  month  ending  that  date. 


Copyright,  1917,  The  Ronald  Press  Company 


1-11-3 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

SUMMARY  OF  TRANSACTIONS 


APRIL  2 
Give  petty  cashier  check  for  $87  to  replenish  petty  cash  fund  upon  presen- 
tation of  receipts  for  disbursements  chargeable  as  follows:  $24  to  Miscel- 
laneous Selling  Expenses ;  $11  to  Delivery  Expenses  ;  |35  to  Office  Expenses  ; 
and  $17  to  General  Expenses.   Purchase  30  automobiles  from  Well-Built  Auto  Co. 
at  $1,500  each,  invoice  No.  8621,  dated  March  30,  terms  1/10,  net  30  days. 

APRIL  3 
Pay  commissions  on  automobile  sales  to  John  White,  amounting  to  $3,550. 
Pay  rent  for  March  and  April,  $100.  Pay  for  repair  of  auto  truck  which  was 
damaged  in  a  collision,  $514  (charge  Delivery  Expense).   Pay  freight  bill  of 
$100  on  accessories  and  supplies  sale  to  Frank  Rice  on  March  21  (Freight-Out] . 

APRIL  4 
Receive  a  consignment  of  six  automobiles  from  the  Detroit  Automobile  Co., 
to  be  sold  on  a  20%  commission  basis.   (This  is  to  be  known  as  consignment-in- 
ward No.  1.   Should  this  transaction  be  recorded  on  the  books  of  accoimt?) 
Pay  freight  on  above  automobiles  amounting  to  $250  which  is  chargeable  against 
the  consignment.   Sold  F.  A.  Norton  of  Bloomfield  one  automobile  (from  our  own 
stock)  at  $2,000,  terms  C.  0.  D.   Pay  freight  on  the  auto  sold  to  F.  A.  Nor- 
ton, $35,  the  agreement  being  to  ship  f.o.b.  Bloomfield. 

APRIL  5 
Purchase  safe  for  store,  paying  $200.   Fred  Miller  takes  accessories  from 
stock  which  are  to  be  charged  at  $210,  the  cost  thereof. 

APRIL  6 
Cash  sale  of  accessories  $350.   James  Garage  Co.  send  us  the  following 
account  sales  on  consignment-outward  No,  2: 


ACCOUNT  SALES  WITH  MILLER  BROS. 

Sales — 10  automobiles  at  $2,200  each  $22,000.00 

Deduct — Storage  $  100.00 

Commission  2,000.00    2,100.00 


Net  Proceeds  $19,900.00 


They  send  us  a  check  for  $9,900  and  give  us  a  30-day  note,  bearing  interest  at 
6%  for  the  balemce  of  the  net  proceeds  on  the  account  sales,  amounting  to 
$10,000. 

APRIL  7 
Pay  storage  charges  of  $60  on  consignment-inward  No.  1. 

Copyright,  1917,  The  Ronald  Press  Company 


1-11-4 

APRIL  9 
W.  F.  Newton  remits  a  check  for  $5,600  and  a  30-day  6%  note  for  $2,000  in 
full  settlement  of  consignment-outward  No,  1.   An  account  sales  for  this  con- 
signment was  received  March  26.   The  note  is  signed  by  Lloyd  Jones  and  in- 
dorsed by  W.  y.  Newton.  We  pay  on  account  invoice  Ho.   8621  from  the  Well-Built 
Auto  Co.,  by  remitting  a  check  for  $39,600,  the  balance  of  $400  being  a  dis- 
count of  1^   which  they  allow. 


APRIL  10 
Receive  remittance  on  C.  0.  D.  to  F.  A.  Norton,  $2,000. 
accessories  $165. 


Cash  sale  of 


APRIL  11 
Receive  a  consignment  of  four  automobiles  from  the  Star  Auto  Co.,  to  be 
sold  on  a  20%  commission  basis  (consignment -inward  No.  2). 


APRIL  12 
Sell  the  six  automobiles  of  the  Detroit  Automobile  Co.  for  $12,000  cash 
(consignment -inward  No.l).   Pay  bill  for  supplies  and  stationery,  amounting  to 
$2,400,  in  connection  with  the  installation  of  the  new  bookkeeping  system  March 
1  (charge  Office  Expense).  Pay  bill  of  $4,800  for  bill-board  advertising  for 
the  two  months  of  March  and  April  per  contract  with  Slade  &  Co. 


APRIL  .13 
Pay  our  note  of  March  12,  in  favor  of  Well-Built  Auto  Co.,  with  interest, 
giving  a  check  for  $10,100  and  a  new  note  for  30  days  from  April  12  at  6%  for 
the  balance. 

APRIL  14 
Send  Detroit  Automobile  Co.  the  following  account  sales  on  consignment -in- 
ward No.  1: 


ACCOUNT  SALES  WITH  DETROIT  AUTOMOBILE  CO 


SALES  — 6  automobiles  at  $2,000  each 
DEDUCT — Fr e  ight 

Storage 

Commission 

NET  PROCEEDS 


$  250.00 

60.00 

2,400.00 


$12,000.00 


2,710.00 


1,290.00 


Send  them  a  check  for  the  net  proceeds.   (Note  that  the  commission  of  $2,400 
represents  an  earning  and  journal  entry  must  be  made  for  same.)   C.  0.  D.  sale 
to  John  Winston  of  one  automobile  at  $2,000  f.o.b.  St.  Louis,  shipped  sight 
draft,  bill  of  lading  attached.   Pay  freight  on  above  automobile  $50.   (Is 
this  freight  chargeable  to  C.  0.  D.  account  or  Auto  Freight -Out?) 

Copyright,  1917,  The  Ronald  Press  Company 


Solution  to  Assignment  1-10-2 


TRIAL  BALANCE—MILLER  BROS. 
MARCH  31,  19— 


1-11-5 


Warehouse  and  Office  Equipment 

Delivery  Equipment 

Inventory  of  Merchandise,  March  1 

Consignment  Stock  Outward 

Customers  Ledger 

Notes  Receivable 

Cash 

Petty  Cash  Fund 

Unexpired  Insurance 

Rent  Paid  in  Advance 

Interest  Prepaid 

Creditors  Ledger 

Notes  Payable 

Bank  Loan 

Notes  Receivable  Discounted 

Fred  Miller — Capital  Account 

August  Miller — Capital  Account 

Auto  Sales 

Auto  Return  Sales 

Auto  Rebates  and  Allowances 

Accessories  and  Supplies  Sales 

Accessories  and.   Supplies  Return  Sales 

Profits  on  Consignments-Outward 

Discount  on  Purchases 

Interest  Received 

Auto  Purchases 

Auto  Freight-In 

Accessories  and  Supplies  Purchases 

Office  Salaries  and  Expense 

General  Expense 

Delivery  Expenses 

Advertising 

Salesmen's  Salaries  and  Commissions 

Miscellaneous  Selling  Expense 

Discount  on  Sales 


$1,250.00 

1,750.00 

10,890.00 

18,300.00 

40,912.00 

2,400.00 

56,066.27 

100.00 

60.00 

300.00 

42.00 

$21,900.00 

20,000.00 

6,000.00 

2,400.00 

15,000.00 

15,000.00 

38,312.00 

2,000.00 

200.00 

59,310.00 

1,710.00 

' 

1,600.00 

364.50 

.77 

6,000.00 

500.00 

34,580.00 

60.00 

50.00 

253.00 

350.00 

90.00 

1,520.00 

504.00 

$179,887.27 

$179,887.27 

Copyright,  1917,  Ths  Ronald  Press  Company 


1-11-6 


Solution  to  Problem  7 

-September  30,  1917- 

(1) 
Consignments-Outward  Trading  Account 
To — Consignments-Outward 
To  close  out  inventory  of  consignments  on  Sept. 
which  have  been  sold  during  month  as  follows: 
NUMBER    COST     CHARGES  RETURNS     NET 
696     $455.00   $8.00   $300.00   $163.00 
699      780.00   780.00 


$943.00 


$943.00 


$1,235.00 


!.00   $300.00   $943.00 


(2) 


Consignments-Outward  Trading  Account 
Consignments- Out ward 

To-Merchandise  Purchases 
To  transfer  cost  of  shipments  during  September 

NUMBER           CLOSED  OUT  OPEN 

801  $  660.00       

802  1,540.00       

803             $1,056.00 

804            875.00 


$2,200.00 


$1,931.00 


2,200.00 
1,931.00 


4,131.00 


(3) 
Consignments-Outward  Trading  Account 
Consignments-Outward 
To — Freight 
To  transfer  cost  of  freight  on  Sept. 
NUMBER  CLOSED  OUT 

801  $15.00 

802  '       46.00 
804  


$61.00 


shipments 
OPEN 


$16.00 
$16.00 


61.00 
16.00 


77.00 


(4) 
Receipts  from  Consignments-Outward 

To — Consignments-Outward  Trading  Account 
Consignments-Outward 

To  transfer  receipts  on  consignments  outward; 

NUMBER           CLOSED  OUT  OPEN 

696              $275.00  

699               821.00  

801  680.00  

802  1,674.00  

803            $800.00 


$3,450.00 


$800.00 


4,250.00 


3,450.00 
800.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-11-7 


(5) 
Consignments-Outward  Trading  Account 
To — Profit  and  Loss 
To  transfer  gross  profit  on  consignments  closed 
out  as  follows: 


NUMBER 
696 
699 
801 
802 


AMOUNT 
$112.00 

41.00 
5.00 

88.00 

$246.00 


$246.00 


$246.00 


It  would  be  desirable,  perhaps,  to  refer  to  the  net  figure  as  "Consign- 
ments-Outward less  Advances  from  Consignees."   The  method  of  carrying  the  con- 
signments-outward on  the  balance  sheet  is  correct. 


ANSWERS  TO  QUESTIONS 


Answer  to  Question  22 — 


C  D,  CONSIGNEE 
IN  ACCOUNT  WITH 
A  B  SEED  COMPANY 
March  30,  1917: 

Received  Consignment  of  15,200  packages  at  10?f 

DEDUCTIONS  ALLOWED: 

March  30,  1917:  Freight  paid 

August  1,  1917:  2,490  packages  returned  at  lO^zf 


August  1,  1917 


$1,520.00 


$4.75 
249.00 


Commission  of  20%  on  sales  of  12,710  packages  at  100  254.20 
Total  Deductions  allowed 
NET  PROCEEDS 


507.95 


$1,012.05 


Answer  to  Question  23 — The. effect  of  this  practice  is  to  take  up  profits 
unearned  on  consignments  not  closed  out  at  the  date  the  books  are  closed. 
Consignments  should  not  be  treated  as  sales  even  though  they  may  all  be  closed 
within  a  fiscal  period.   The  true  profit  on  the  transaction  is  lost  sight  of. 
Another  effect  on  the  accounts  is  to  overstate  accounts  receivable.  Until 
consignments  are  settled  for  they  remain  part  of  the  merchandise  inventory  to 
be  valued  at  cost,  not  selling  price.   Moreover,  it  is  oftentimes  desirable  to 
indicate  on  a  statement  of  profit  and  loss  the  profit  from  trading  and  from 
consignments  separately. 


Copyright,  1917,  The  Ronald  Press  Company 


1-11-8 


Answer  to  Question  24— 

Face  of  note 

ADD — Interest  at  6%  for  90  days 


DEDUCT — Discount  of  5%  for  75  days 
NET  PROCEEDS 

ENTRIES  ON  BOOKS  OF  LYNN 


$1,500.00 
22.50 

$1,522.50 
15.86 

$1,506.64 


(1) 
-January  7,  1917- 

Notes  Receivable  $1,500.00 

To— E.  G.  Kemp  $1,500.00 

To  record  90-day  note  received  on  account,  in- 
terest at  6%,  dated  January  7. 

(2) 
-January  22,  1917- 
Cash  1,506.64 

Prepaid  Interest  15.86 

To — Notes  Receivable  Discounted  1,500.00 

Interest  Received  22.50 

E.  G.  Kemp's  note  discounted.   (Prepaid  Interest 
account  will  be  reduced  at  the  end  of  an  ac- 
counting period  by  the  amount  expiring  during 
that  period. ) 

(3) 
-April  6,  1917- 
Notes  Receivable  Discounted  1,500.00 

To — Notes  Receivable  1,500.00 

£.  G.  Kemp  pays  his  note  due  today. 

ENTRIES  ON  BOOKS  OF  KEMP 

(1) 
-January  7,  1917- 
J.  S.  Lynn  1,500.00 

To— Notes  Payable  1,500.00 

Gave  90-day  note  on  account,  interest  at  6%, 
•  dated  January  7. 

(2) 
-April  6,  1917- 
Notes  Payable  1,500.00 

Interest  Accrued  on  Notes  Payable  22.50 

To— Cash  1,522.50 

Paid  our  note  dated  January  7,  1917,  due  today. 


Copyright,  1917,  The  Ronald  Press  Company 


1-11-9 

CONS I GNMENT S- INWARD 

Review  1-9-7  to  10. 

The  records  of  the  consignee  should  be  so  kept  that  any  information  con- 
cerning each  consignment  received  may  be  easily  available.   They  must  also  be 
accurate  so  that  where  numerous  consignments  are  handled  no  item  can  be 
omitted  in  preparing  accounts  sales.   But  the  most  important  feature  is  that 
the  accounts  having  to  do  directly  with  the  consignments  (sales  and  deductible 
expenses)  are  AGENTS'  accounts  and  are  kept  for  the  benefit  of  the  PRINCIPAL 
or  consignor.   This  income  and  expense  should  therefore  be  kept  in  separate 
accounts  and  not  confused  with  sales  of  goods  owned  or  expenses  incurred  in 
making  sales  of  owned  goods. 

There  are  several  ways  of  constructing  the  accounts  of  a  business  so  that 
consignments- inward  may  be  handled  in  conformity  with  the  above  principles. 
Ordinarily,  it  is  unnecessary  to  enter  the  value  of  the  consignments  received. 
In  many  cases  no  notification  of  the  value  will  be  sent  the  consignee,  the 
selling  price,  perhaps,  depending  on  market  quotations;  moreover  the  goods 
received  are  not  part  of  the  consignee's  assets  nor  is  any  legal  liability 
present  until  the  goods  have  been  sold.   The  two  methods  following  indicate 
primarily  ways  in  which  consignments-inward  are  handled  on  the  books  of  com- 
mission merchants  who  deal  in  produce — vegetables,  fruits,  butter,  eggs,  etc., 
and  who  are  del  credere  agents.  The  same  methods  may  apply  also  to  other 
businesses  where  similar  conditions  exist. 

1.  Where  the  number  of  consignments- inward  is  small,  as  is  the  case  with 
Miller  Brothers,  two  accounts  may  be  opened:  "Advances  on  Consignments- Inward* 
and  "Earnings  on  Consignments-Inward."   The  method  of  operating  these  two  ac- 
counts may  be  seen  from  the  following: 

ADVANCES  ON  CONSIGNMENTS- INWARD 
DEBIT  WITH  CREDIT  WITH 

All  charges  paid  by  the  consignee       At  the  beginning  of  a  period,  an 
and  deductible  on  the  account  amount  equal  to  the  third  debit 

sales,  such  as  drafts,  freight,         per  contra  (made  at  the  end  of 
drayage,  storage,  etc.,  at  the  the  previous  period),  at  the  same 

same  time  crediting  Cash  or  Ac-         time  debiting  Earnings  on  Con- 
counts  Payable.  signments-Inward.   (This  is  a 

Commission  deducted  by  the  consignee       "reversing"  entry. ) 

on  the  account  sales  as  his  profit.    Sales  of  consignments,  at  the  same 
at  the  same  time  crediting  Earn-        time  debiting  Cash  or  Customers 
ings  on  Consignments-Inward.  account. 

At  the  end  of  a  monthly  or  fiscal 
period,  commission  taken  by  the 
consignee  as  the  profit  to  which 
he  is  entitled  on  sales  on  con- 
signments not  closed  out,  at  the 
same  time  crediting  Earnings  on 
Cons ignment s- Inward . 

Settlements  made  with  consignor, 
being  the  net  proceeds  appearing 
on  the  account  sales,  at  the  same 
time  crediting  cash  or  the  con- 
signor's personal  account. 

Copyright,  1917,  The  Ronald  Press  Company 


I-ll-lO 
The  balance  of  the  account,  if  more  than  one  consignment  remains  open,  may 
be  made  up  of  both  (1)  assets  (advances  on  consignments  of  which  no  sales  have 
been  made  or  the  sales  of  which  so  far  do  not  exceed  the  advances  thereon) , 
and  (2)  liabilities  (sales  of  consignments  exceeding  the  advances).   If  such 
is  the  case,  two  balances  should  be  carried  down  when  the  account  is  ruled, 
one  a  debit  and  the  other  a  credit. 

EARNINGS  ON  CONSIGNMENTS- INWARD 
DEBIT  WITH  CREDIT  WITH 

At  the  beginning  of  a  period,  an        Commission  deducted  by  the  con- 
amount  equal  to  the  second  credit       signee  on  the  account  sales  as 
per  contra  (made  at  the  end  of  the      his  profit,  at  the  same  time 
previous  period) ,  at  the  same  time       debiting  Advances  on  Consign- 
crediting  Advances  on  Consign-  ments-Inward. 

laents- Inward. 

At  the  end  of  a  monthly  or  fiscal 
period,  commission  taken  by  the 
consignee  as  the  profit  to  which 
he  is  entitled  on  sales  of  con- 
signments not  closed  out,  at  the 
same  time  debiting  Advances  on 
Consignments-Inward. 

The  balance  of  the  account  is  a  credit,  representing  income  from  consignments- 
inward  and  will  be  closed  out  at  the  end  of  the  period  to  Profit  and  Loss. 

If  a  number  of  consignments- inward  are  on  hand  at  the  same  time,  it  may  be 
found  desirable  to  install  a  subsidiary  ledger  called  a  "Consignments- Inward 
Ledger."  A  page  is  assigned  to  each  consignment  received,  which  page  is  re- 
moved when  the  consignment  has  been  sold  out  and  settled  for.  Advances  on  Con- 
signments-Inward thus  becomes  a  controlling  account  and  special  columns  should 
be  provided  in  the  cash  receipts  book,  cash  disbursements  book,  sales  book, 
and  general  journal.   Under  such  conditions  the  debits  and  credits  to  the  ac- 
count as  outlined  above  will  remain  the  same  except  they  will  be  made  in  to- 
tals and  only  at  the  end  of  each  period. 

Hence  under  the  first  method,  the  sales  made  and  the  expenses  incurred  on 
behalf  of  the  consignor  are  made  to  offset  each  other  in  the  same  account. 

2.  In  the  second  method,  separate  accounts  are  kept  with  each  element  ap- 
pearing on  the  account  sales:  freight,  cartage,  drafts,  other  deductions,  net 
proceeds,  and  sales.   The  expense  accounts  are  debited  through  the  cash  dis- 
bursements book  or  purchases  record,  etc.  ;  the  Drafts  account  and  the  Net  Pro- 
ceeds acQOunt  are  debited  through  the  cash  disbursements  book  as  the  payments 
are  made  or  liabilities  incurred.   Special  columns  may  be  provided  in  books  of 
original  entry  if  these  items  are  numerous.   A  Sales  of  Consignments-Inward 
account  should  be  credited  periodically  from  the  total  of  a  column  headed 
"Sales  of  Consignments- Inward"  appearing  in  the  sales  book. 


Copyright,  1917,  The  Ronald  Press  Company 


I-ll-ll 

When  a  consignment  is  closed  out  under  this  method.  Cash  or  the  consign- 
or's personal  account  will  be  credited  and  Net  Proceeds  account  debited.  But 
this  entry  does  not  show  that  a  portion  of  the  expense  accounts,  those  per- 
taining to  the  consignment  just  closed,  nor  that  a  part  of  the  Sales  account 
has  been  settled  for  by  the  mere  act  of  remitting  net  proceeds.  Nor  does  it 
indicate  in  any  way  that  a  profit  (commission)  has  been  earned.   Hence,  at  the 
time  net  proceeds  are  remitted,  a  journal  entry  should  be  made  to  write  off 
that  portion  of  the  ledger  accounts  which  have  been  settled  for  and  to  set  up 
the  earnings  or  commission  retained  by  the  consignee.   The  following  entry  is 
based  on  the  illustration  of  account  sales  appearing  in  1-9-7  and  is  made  on 
the  books  of  0.  B.  Fox: 

-April  4,  1917- 
Sales  $46.00 

To — Freight  $  3.45 

Cartage  .80 

Storage  1.20 

Sales  Discounts  .92 

Commissions  3.22 

Net  Proceeds  36.41 

To  close  out  expenses  and  income  from  lot  No.  87934, 
and  to  set  up  commission  earned. 

As  under  the  first  method,  when  the  consignments  received  are  numerous  a 
subsidiary  ledger  may  be  kept.  A  page  is  allowed  for  each  consignment  which 
shows  advances  and  sales  thereon.   But  instead  of  having  but  one  controlling 
account  there  will  be  several  controlling  accounts  or  several  accounts  making 
up  the  controlling  figures.   Thus,  in  the  business  of  0.  B.  Fox  there  would  be 
five  accounts  controlling  the  postings  in  his  consignments-inward  ledger: 
Sales,  Freight,  Cartage,  Storage,  and  Net  Proceeds,  the  sum  of  whose  balances 
niust  equal  the  sum  of  the  balances  of  the  accounts  with  consignments  not 
closed  out.   Take,  for  example,  the  nature  of  postings  made  to  the  Freight  ac- 
couot : 

FREIGHT  ON  CONSIGNMENTS- INWARD 
DEBIT  WITH  CREDIT  WITH 

Freight  expense  incurred  on  consign-     Postings  from  journal  entries  such 
ments-inward,  at  the  same  time  as  the  one  appearing  above,  the 

crediting  cash  or  accounts  pay-         effect  of  which  is  to  remove  from 
able.  the  account  freight  charges  which 

have  been  settled  for. 

The  baleince  of  the  account  will  be  a  debit,  representing  the  freight  expense 
on  account  of  consignments  not  yet  closed  out,  and  is  therefore  an  asset  to  be 
carried  forward  to  the  next  period. 

On  the  balance  sheet  the  total  of  debit  balances  of  the  subsidiary  ledger 
accounts  appears  as  an  asset,  "Advances  on  Consignments-Inward,"  among  the 
current  assets  following  "Merchandise  Inventory"  ;  the  total  of  credit  balances 
appears  as  a  liability,  "Due  on  Consignments  Not  Closed  out,"  along  with  Ac- 
counts Payable. 

Copyright,  1917,  The  Ronald  Press  Company 


1-11-12 
To  take  up  at  the  end  of  a  period  the  adjustment  of  commissions  earned  on 
consignments  not  yet  closed  out,  a  journal  entry  should  be  made  debiting  Sales 
account  and  also  the  individual  accounts  with  consignments  in  the  subsidiary 
ledger  (if  one  is  kept)  and  crediting  Commissions  account.   This  entry  will  be 
reversed  at  the  beginning  of  the  following  period. 

A  further  elaboration  of  the  second  method  is  to  introduce  a  journal  espe- 
cially adapted  for  the  making  of  entries  similar  to  the  one  above,  called  an 
Account  Sales  journal.   Since  the  entries  are  all  alike  no  explanation  is  re- 
quired and  each  entry  requires  but  one  line  as  in  a  Sales  journal.   Special 
columns  are  provided  for  each  element  and  postings  are  made  in  total  to  the 
ledger  accounts  affected. 

REFERENCES : 

Cole,  pages  380-384 

Esquerre,  pages  186-207 

Greendlinger  and  Schulze,  pages  356-358 


Copyright,  1917,  The  Ronald  Press  Company 


1-12-1 


COMPLETE  ACCOUNTING  COURSE— FART  I 

Lecture  12 

BILLS  OF  EXCHANGE;  INVENTORIES 


f 


Problem  11 

A  certain  trading  corporation  desires  to  prepare  its  financial  statements 
as  of  September  30,  1917,  but  takes  no  inventory  at  that  date.   It  has  no  per- 
petual inventory  records,  but  the  management  states  that  the  ratio  of  gross 
profit  to  net  sales  has  remained  substantially  the  same  for  many  years,  namely 
35%,  and  that  the  ratio  will  remain  the  same  for  the  year  1917.  A  summary  of 
the  merchandise  account  has  been  compiled,  from  which  you  are  required  to  pre- 
pare a  statement  showing  the  estimated  inventory  on  hand  September  30,  1917. 

SUMMARY  OF  MERCHANDISE  ACCOUNT 
SEPTEMBER  30,  1917 

Inventory,  January  1,  1917  $  6,100.00    Sales                   $44,500.00 

Purchases  28,450.00    Discounts  on  Purchases        960.00 

Freight-In  895.00 

Freight-Out  1,200.00 

Allowances  on  Sales  2,360.00 

MISCELLANEOUS  QUESTIONS 

Question  27 — Outline  several  ways  in  which  cash  sales  may  be  recorded  in 
the  books  of  Miller  Brothers,  bearing  in  mind  the  necessity  of  departmental- 
izing sales. 

Question  28 — 

(a)  How  are  C.  0.  D.  sales  handled  in  the  books  of  account? 

(b)  Petty  charge  sales  to  occasional  customers? 

Question  29 — What  are  selling  expenses?  General  and  administrative  ex- 
penses?  In  your  answer  name  the  accounts  with  which  you  are  familiar  that 
would  fall  under  each  head. 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

SUMMARY  OF  TRANSACTIONS 

APRIL  16 
Purchase  accessories  from  New  York  Auto  Supply  Co.  $21,200,  invoice  No. 
7738.  terms  1/10,  net  30  days,  f .  o.  b.  shipping  point.  Pay  freight  of  $360 
on  above  bill. 

Copyright.  1917,  The  Ronald  Press  Company 


1-12-2 
APRIL  17 
Ship  James  Garage  Co.  two  automobiles,  cost  price  |1,600  each,  to  be  sold 
on  a  5%  commission  basis  (consignment-outward  No.  3).   Pay  salesmen's  travel- 
ing expenses,  as  per  their  reports,  $300.   Pay  salary  of  auto  truck  driver, 
$100  for  month  of  April.   Sell  accessories  to  Frank  Rice  on  account  $230.  Pay 
salesmen's  salaries  $2,300,  office  help  $400,  and  manager's  salary  $500,  by 
pay-roll  check.   Pay  for  office  supplies,  $600.   Receive  notice  from  bank  of 
collection  on  C.  0.  D.  sale  to  John  Winston  April  14. 

APRIL  18 
Pay  $3,000  on  our  note  discounted  by  the  bank  and  give  them  a  demand  note 
bearing  interest  at  6%  for  the  balance  of  $3,000.   (Note  that  here  the  note  is 
not  discounted  but  the  interest  is  paid  when  the  note  becomes  due.)   Sell  ac- 
cessories amounting  to  $110,  C.  0.  D. ,  to  John  Lange. 

APRIL  20 
Note  of  $2,400  of  Frank  Rice,  discounted  by  the  bank  March  21,  is  paid  by 
the  maker.   The  New  York  Auto  Supply  Co.  accepts  the  return  of  accessories 
amounting  to  $3,600. 

APRIL  21 
Make  an  allowance  of  $10  on  accessories  sale  to  Frank  Rice  April  17.   Draw 
a  30-day  draft  on  Frank  Rice  for  $100  which  he  accepts. 

APRIL  23 
Pay  on  invoice  No.  7738  of  New  York  Auto  Supply  Co.  $10,000,  consisting  of 
cash  $9,900,  and  discount  of  1%,  $100. 

APRIL  24 
Lloyd  Jones  prepays  his  30-day  note  dated  April  9  with  interest  accrued  to 
date. 

APRIL  25 
Discount  the  note  of  James  Garage  Co.  (dated  April  6)  at  the  bank  at  6%. 
In  recording  the  entry  credit  the  difference  between  the  face  value  of  the 
note  and  the  proceeds  therefrom  to  Interest  Received. 

APRIL  26 
Sell  the  four  autos  of  the  Star  Auto  Co.  (consignment -inward  No.  2)  for 
$500  each  to  George  Wilson  on  account.   Send  the  following  account  sales, 
crediting  their  account  in  the  creditors  ledger  for  the  net  proceeds: 

ACCOUNT  SALES  WITH  STAR  AUTO  CO. 
SALES  $2,000.00 

DEDUCT — Storage  $  20.00 

Commission  400.00     420.00 


NET  PROCEEDS  $1,580.00 


The  storage  represents  our  storage  charge  and  may  be  treated  as  a  consign- 
ment earning. 

Copyright,  1917,  The  Ronald  Press  Company 


1-12-3 

APRIL  27 
Receive  a  consignment  of  two  automobiles  from  Midland  Motor  Co.  to  be  sold 
on  commission.   (This  is  consignment -inward  No.  3.)   Pay  freight  on  this  con- 
signment, ^100,  and  advance  Midland  Motor  Co.  |1,000  cash  thereon. 

APRIL  28 
Pay  in  cash  salaries  of  partners  for  two  months  of  March  and  April,  Fred 
Miller  receiving  J800  and  August  Miller  $1,000. 

APRIL  30 
Pay  commissions  to  salesmen  of  $4,900.   Reimburse  petty  cash  fund  by  a 
check  of  $95,  chargeable  to  General  Expense.   The  bank  has  credited  us  with 
|50  interest  on  our  average  daily  balance  during  March  and  April. 

Adjustments  of  the  following  items  should  be  made  before  closing  the 
books: 

1.  Rent  paid  in  advance. 

2.  Interest  accrued  on  bank  loan  and  on  notes  payable.   (This  can  all 

be  credited  to  Interest  Accrued  on  Notes  Payable  account.) 

3.  Interest  prepaid  (transfer  to  Interest  Paid). 

4.  Insuramce  expired  to  date  is  $10. 

5.  The  inventory  of  stationery  is  $300. 

6.  Taxes  accrued  during  the  two  months  amount  to  $200. 


Solution  to  Problem  8 


EDWARDS  &  CO.  AND  PLANT  &  CO. 
JOINT  ACCOUNT 
(Date) 
PROCEEDS  FROM  SALES: 

First  Draft  $3,200.00 

Second  Draft  3,100.00  $6,300.00 


DEDUCT— COST  OF  SALES: 

Merchandise  Purchased  $5,000.00 

Freight  420.00 

Insurance  60.00 

Commission  (2%  on  amount  of  invoice  of 

merchandise)  100.00   5,580.00 


NET  PROFIT  ON  VENTURE  $  720.00 


Apportioned  as  follows: 

Plant  k   Co.— ^  $360.00 

Edwards  &  Co.~3i  360.00 


Total  as  above  $720.00 


Copyright,  1917,  The  Ronald  Press  Company 


DEBIT 
Discount  on  Note 
Note  Paid 
Balance — check  sent 


EDWARDS  &  CO.  ACCOUNT 


$  60.00 
3,000.00 
1,500.00 

$4,560.00 


CREDIT 
Cash  Received 
Note  Received 
Proportion  of  Profits 


1-12-4 


$1,200.00 

3,000.00 

360.00 

$4,560.00 


Journal  entries  necessary  on  books  of  Plant  &  Co. : 

(1) 
Cash  $1,200.00 

Note  Receivable  3,000.00 

To— Edwards  &  Co.  $4,200.00 

To  record  receipt  of  check  for  $1,200  and  six 
months*  note  of  $3,000  for  purpose  of  joint 
venture, 

(2) 
Cash  2,940.00 

Edwards  &  Co.  60.00 

To— Note  Receivable  3,000.00 

To  record  discounting  of  note  of  Edwards  &  Co. 
which  they  gave  us  in  lieu  of  cash. 

(3) 
Plant  &  Co.  and  Edwards  &  Co. — Joint  Account       5,480.00 

To — Cash  (or  Expense  Accounts)  5,480.00 

To  record  payments  made  on  account  of  >oint 
venture  as  follows: 

Smith  &  Greer,  for  merchandise  $5,000.00 
Freight  420.00 

Insurance  60.00 


$5,480.00 


(4) 
Plant  &  Co.  and  Edwards  &  Co. — Joint  Account        100.00 
To — Commissions  Earned  (or  Profit  on  Joint 
Venture) 
To  take  credit  for  2%  commission  on  invoice 
•  of  merchandise. 

(5) 
Cash  3,200.00 

To — Plant  &  Co.  and  Edwards  &  Co. — Joint 
Account 
To  record  receipt  of  first  draft  for  nez   pro- 
ceeds. 


100.00 


3,200.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-12-5 


(6) 
Edwards  &  Co.  $3,000.00 

To — Cash  13,000.00 

Paid  note  of  Edwards  &  Co. 

(7) 
Cash  3,100.00 

To — Plant  *  Co.  and  Edwards  4  Co. — Joint 

Account  3,100.00 

To  record  receipt  of  second  draft. 

(8) 
Plant  &  Co.  and  Edwards  &  Co. — Joint  Account        720.00 

To — Edwards  &  Co.  360.00 

Profit  on  Joint  Venture  360.00 

To  close  out  joint  account  and  distribute  the 
profits  thereof  as  per  agreement. 

(9) 
Edwards  &  Co.  1,500.00 

To — Cash  1,500.00 

Sent  Edwards  &  Co.  check  to  close  their  ac- 
count. 


Solution  to  Problem  9 

ADJUSTING  ENTRIES 

(1) 
Purchases — Silks  $2,145.00 

Rent  150.00 

Unexpired  Insurance  220.00 

To — Accounts  Payable  $2,515.00 

To  set  up  accounts  payable  not  yet  recorded. 

(2) 
Taxes  200.00  ^ 

To — Taxes  Accrued  200.00 

To  set  up  taxes  accruing  during  October. 

f 
(3) 
Interest  Paid  140.00 

To — Interest  Accrued  on  Notes  Payable  140.00 

To  t£ike  up  interest  accrued  and  not  recorded  on 
October  31. 

(4) 
Insurance  Expired  135.00 

To — Insurance  Unexpired  135.00 

To  write  off  insurance  expired. 

Copyright,  1917,  The  Ronald  Press  Company 


CLOSING  ENTRIES 
(5) 
Silks — Trading  Account 
Linens — Trading  Account 

To — Inventory — Silks 
Invent  ory — Linens 
To  close  out  inventories  on  November  1,  1916. 


$18,140.00 
22,900.00 


1-12-6 


$18,140.00 
22,900.00 


(6) 
Inventory — Silks  19,475.00 

Inventory — Linens  8,460.00 

To — Silks — Trading  Account  19,475.00 

Linens — Trading  Account  8,460.00 

To  set  up  inventories  on  October  31,  1917,  as 
per  total  of  inventory  sheets. 

(7) 

Silks—Trading  Account  64,078.00 

To — Purchases — Silks 
Freight-In — Silks 
Allowances  and  Returns — Silks 
To  treinsfer  accounts. 

(8) 
Linens — Trading  Account  52,612.00 

To — Purchases — Linens 
Freight-Out — Linens 
Allowances  and  Returns — Linens 
Discounts  on  Sales — Linens 
To  transfer  accounts. 

(9) 

Sales—Silks  82,476.00 

Sales— Linens  85,144.00 

To— Silks— Trading  Account  82,476.00 

Linens — Trading  Account  85,144.00 

To  transfer  sales  accounts  to  trading. 

Silks— Trading  Account  19,733.00 

Linens — Trading  Account  18,092.00 

To— Profit  and  Loss  37,825.00 

«    To  transfer  gross  profit  from  trading. 


59,310.00 
1,798.00 
2,970.00 


44,462.00 
1,520.00 
2,515.00 
4,115.00 


(11) 


Profit  and  Loss 
To — Rent 
Taxes 
Salaries 

Insurance  Expired 
Heating  and  Lighting 
Interest  Paid 
To  close  out  expense  accounts. 


21,445.00 


1,800.00 
2,400.00 
11,675.00 
1,315.00 
3,540.00 
715.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-12-7 

(12) 

Profit  and  Loss  $16,380.00 

To — Partners'  Drawing  Accounts  (in  detail)  $16,380.00 

To  close  out  net  profits  for  year. 


ANSWERS  TO  QUESTIONS 
Answer  to  Question  25 — 

-December  31,  1917- 

Membership  Dues  Unearned  $7,172.50 

To — Membership  Dues  Earned  $7,172.50 

To  close  out  deferred  credit  at  beginning  of 
period  (January  1,  1917). 


(2) 

Membership  Dues  Earned  7,600.00 

To — Membership  Dues  Unearned  7,600.00 

To  set  up  deferred  credit  to  income  at  December 
31,  1917,  on  account  of  prepaid  membership 
dues  as  follows: 

Dues  billed  April  1,  1917--%  $1,525.00 
Dues  billed  July  1,  1917—^/4  1,275.00 
Dues  billed  October  1,  1917—%    4,800.00 


Total  as  above  $7,600.00 


\ 


The  Membership  Dues  Earned  account  will  now  stand  with  a  net  credit  of 
$23,372.50,  which  represents  the  income  from  dues  applicable  to  the  year  1917. 

Answer  to  Question  26 — 

(a)  April  6,  1917,  counting  the  date  of  issue  and  omitting  the  due  date  or 
vice  versa. 

(b)  April  7,  1917. 

(c)  The  practice  varies  as  between  banks.   If  the  360-day  year  is  used 
Bore  interest  will  be  collected  than  from  the  use  of  the  365-day  year.  Where 
the  interest  runs  for  a  month  or  number  of  months,  the  ratio  applying  is  the 
number  of  months  to  twelve.   For  instance,  under  the  Illinois  statute  in  com- 
puting the  legal  rate  of  interest  on  notes  and  bills  which  run  "for  any  number 
of  days  less  than  a  month,  a  day  shall  be  considered  a  thirtieth  part  of  a 
month,  and  interest  or  discount  shall  be  computed  for  such  fractional  parts  of 
a  month  upon  the  ratio  which  such  number  of  days  shall  bear  to  thirty." 

Copyright,  1917,  The  Ronald  Press  Company 


1-12-8 

BILLS  OF  EXCHANGE 
DEFINITION — "A  bill  of  exchange  is  an  unconditional  order  in  writing,  ad- 
dressed by  one  person  to  another,  signed  by  the  person  giving  it,  requiring 
the  person  to  whom  it  is  addressed  to  pay  on  demand,  or  at  a  fixed  or  deter- 
minable future  time,  a  sum  certain  in  money,  to  order  or  to  bearer."   (Uniform 
Negotiable  Instruments  Act.)   There  are  FOREIGN  and  INLAND  bills  of  exchange, 
the  most  common  illustration  of  the  latter  class  being  the  ordinary  commercial 
draft..   A  CHECK  is  also  "a  bill  of  exchange  drawn  on  a  bank,  payable  on  de- 
mand." 

PARTIES — There  are  four  parties  concerned  in  a  bill  of  exchange:  the 
DRAWER  or  MAKER,  the  DRAWEE,  the  ACCEPTOR,  and  the  PAYEE.   The  drawer  and 
payee  are  often  the  same  party,  while  the  drawee  and  acceptor  are  usually  the 
same  party.   An  acceptor  other  than  the  payee  is  an  ACCOMMODATION  ACCEPTOR. 

ACCOUNTING  FOR  DRAFTS — Checks  are  treated  as  cash.  Drafts  are  handled  in 
various  ways,  depending  on  whether  they  are  sight  or  time  drafts,  and  if  sight 
drafts,  whether  banks  are  willing  to  accept  them  as  cash. 

1.  SIGHT  DRAFTS — Ordinary  sight  drafts  are  handled  as  cash  by  the  payee, 
while  of  course  the  drawee  pays  cash  as  soon  as  he  is  notified  by  the  bank  of 
the  draft.   "Collection"  drafts  and  sometimes  other  sight  drafts  may  not  be 
accepted  as  cash  by  banks.   If  such  is  the  case,  the  bank  acts  as  a  collection 
agent  and  a  memorandum  only  of  the  fact  is  kept  by  the  payee.  When  the  bank 
sends  notice  that  payment  has  been  received,  cash  is  debited  and  the  account 
of  the  drawee  credited,  any  expenses  of  collection  being  charged  to  a  "Collec- 
tion Expense"  or  similar  account.   If  the  drawer  is  not  also  the  payee,  no 
cash  will  be  received  by  the  former  and  on  his  records  he  will  debit  the 
account  of  the  payee: 

-June  6,  1917- 
Payee  $1,000.00 

To — Drawee  $1,000.00 

To  record  the  payment  by  the  drawee  of  our 
draft  dated  June  1,  1917,  in  favor  of  the 
payee. 

2.  TIME  DRAFTS — Time  drafts  must  first  be  ACCEPTED,  that  is,  the  drawee 
must  agree  to  pay  and  must  signify  his  intention  to  do  so  by  writing  the  ac- 
ceptance on  the  face  of  the  draft,  and  thereby  becoming  the  ACCEPTOR.   Or  the 
paper  must  be  accepted  by  a  party  other  than  the  drawee,  in  which  case  such 
party  is  called  an  accommodation  acceptor.   No  entries  are  made  on  the  books 
of  any  of  the  parties  until  acceptance  is  made,  but  as  soon  as  a  time  draft  is 
accepted  it  should  be  treated  as  a  note  receivable  by  the  payee  and  as  a  note 
payable'  by  the  drawee,  since  the  instrument,  when  accepted,  is  in  effect  a 
two-party  agreement.   The  accommodation  acceptor  treats  the  draft  as  a  con- 
tingent liability.   On  the  books  of  both  drawee  and  payee,  the  manner  of 
handling  "acceptances"  is  precisely  the  same  as  the  manner  of  handling  promis- 
sory notes.   If  the  drawer  is  not  also  the  payee  he  may  follow  the  same  treat- 
ment as  suggested  in  the  discussion  of  paid  sight  drafts,  i.e.,  credit  the 
drawee's  account  and  debit  the  payee's  account  when  he  is  notified  of  the  ac- 
ceptance, as  illustrated  in  the  preceding  paragraph. 

Copyright,  1917,  The  Ronald  Press  Company 


1-12-9 

Acceptances  may  be  discounted  and  treated  as  discounted  promissory  notes 
on  the  books  of  the  payee. 

Ordinarily  it  is  unnecessary  to  distinguish  on  the  books  or  on  financial 
statements  between  "notes*  and  "bills"  receivable  or  payable.   The  term  "notes 
receivable"  or  "notes  payable"  generally  covers  both. 

INVENTORIES 

In  the  ordinary  trading  business  three  factors  enter  into  the  gross  profit 
which  is  arrived  at  as  follows: 


SALES 

DEDUCT — Cost  of  Sales  made  up  of  Inventory  at 
beginning  of  period 
Add — P*ur  chases 


Deduct — Inventory  at  end  of  period 
Balance— GROSS  PROFIT 


Merchandise  when  received  is  charged  at  cost  and  when  sold  is  credited  at 
selling  price.   Consequently  the  first  factor,  sales,  and  the  second  factor, 
purchases,  can  be  readily  obtained  from  the  books.   To  obtain  the  third 
factor,  inventory,  it  is  necessary  (1)  to  take  a  physical  inventory  of  the 
stock  on  hand,  or  (2)  to  keep  a  perpetual  inventory. 

Taking  a  physical  inventory  refers  to  the  actual  listing  of  the  stock  on 
hand  at  a  certain  date  so  as  to  show  quantity,  unit  price,  and  amount.   In 
taking  inventory  the  following  points  should  be  given  attention. 

1.  Physical  inventories  are  taken  when  the  stock  is  low,  the  date  usually 
marking  the  close  of  a  season. 

2.  Inventories  are  usually  taken  by  persons  employed  in  the  department 
under  the  direction  of  the  head  of  the  department.   Occasionally  outside 
parties  are  called  in  either  to  "take"  the  inventory  or  to  check  same  as  soon 
as  taken  by  the  employees. 

3.  Strict  instructions  should  be  given  to  the  inventory-takers  as  to  the 
method  to  be  followed  and  the  precautions  to  be  observed.   Written  instruc- 
tions are  preferable. 

4.  The  inventory  sheets  when  handed  out  should  be  numbered  so  as  to  insure 
the  return  of  all  sheets. 

5.  Wherever  possible,  it  is  desirable  to  issue  the  sheets  in  advance  emd 
to  list  the  description  of  the  goods,  location,  etc.  Usually  provision  is 
made  for  designating  damaged,  shop-worn,  and  obsolete  goods.   On  the  day  as  of 
which  inventory  is  taken,  the  data  previously  recorded  would  be  checked  and 
the  quantity  and  price  inserted.   Sometimes  the  pricing  is  done  in  the  office. 

Copyright,  1917,  The  Ronald  Press  Company 


1-12-10 

6.  The  extensions,  footings,  and  recapitulations  should  be  performed  in 
the  office  and  checked  by  some  person  other  than  the  one  making  the  calcula- 
tions in  the  first  place. 

7.  Each  inventory  sheet  should  bear  the  signatures  of  those  taking  the  in- 
ventory (caller  and  lister)  so  that  responsibility  for  errors  can  be  defi- 
nitely placed. 

8.  In  order  to  avoid  confusion  with  new  goods  being  received  and  goods 
being  sold,  it  is  important  that  the  inventory  be  taken  in  the  shortest  pos- 
sible time. 

9.  Goods  sold  after  the  close  of  the  fiscal  period,  but  delivered  before 
inventory-taking,  should  be  included  as  inventory  at  cost. 

10.  Consignments- inward  still  on  hand  should  be  separated  from  the  inven- 
tory of  purchased  goods.   Such  goods  will  be  listed  on  separate  sheets  and 
must  be  excluded  from  the  inventory  totals. 

11.  The  invoices  for  all  goods  taken  into  stock  should  be  entered  on  the 
general  books  before  closing.   The  inventory  which  is  credited  to  the  Trading 
account  should  include  only  merchandise  on  hand,  bills  for  which  have  been 
charged  to  Purchases  account.   Goods  in  transit  will  be  taken  up  by  the  fol- 
lowing entry: 

Merchandise  in  Transit  | 

To  Accounts  Payable  or  Unaudited  Invoices  $ 

To  take  up  goods  in  transit  at  

This  entry  will  be  reversed  at  the  beginning  of  the  next  fiscal  period. 

12.  Prices  are  based  on  the  rule  of  "cost  or  market,  whichever  is  the 
lower  at  the  inventory  date."   In  determining  cost  it  is  proper  to  add 
freight-in,  cartage-inward,  and  import  duties.   Trade  discounts,  quantity  dis- 
coirnts,  rebates,  and  other  allowances  should  be  deducted. 

PERPETUAL  INVENTORIES — The  object  of  a  perpetual  or  "going"  inventory  is 
to  show  the  amount  of  merchandise  on  hand  at  any  date.   A  perpetual  inventory 
bears  the  same  relation  to  merchandise  that  a  cash  record  bears  to  cash.   Re- 
ceipts and  issues  may  be  listed  as  to  (1)  quantities  only,  (2)  prices  only,  or 
(3)  both.   The  price  basis  is  generally  cost,  although  in  some  cases  selling 
price  is  used,  the  all-important  point  being  that  both  receipts  and  issues  are 
priced  on  the  same  basis.  Physical  inventories  are  taken  periodically  to  check 
the  accuracy  of  the  perpetual  inventory.   The  expense  of  keeping  records  of 
this  kind  however,  may  be  far  in  excess  of  the  benefits  derived  and  they  are 
not  as  cpmmon  in  trading  concerns  as  in  manufacturing  enterprises,  where  they 
are  essential  for  cost  data. 

The  advantages  of  a  perpetual  inventory  are: 

1.  To  enable  monthly  profits  to  be  ascertained. 

2.  To  furnish  the  purchasing  department  with  the  data  necessary  to 

keep  stocks  on  hand  between  a  minimum  and  a  maximum  limit. 

3.  To  keep  a  check  on  physical  inventories  with  the  object  of  ascer- 

taining losses  from  theft,  shrinkage,  shortages,  etc. 

Copyright,  1917,  The  Ronald  Press  Company 


1-12-11 

The  perpetual  inventory  controlling  account  is  usually  supported  by  a 
stock  ledger  containing  a  card  or  sheet  for  each  class  of  merchandise.   The 
charges  are  entered  from  the  creditors'  invoices  and  the  credits  from  the 
duplicate  sales  invoices,  individually  or  in  summary  totals.   The  stock  ledger 
accounts  are  adjusted  to  the  physical  inventory  at  the  close  of  each  fiscal 
period. 

Perpetual  inventories  will  be  referred  to  again  in  connection  with  the 
accounts  of  a  manufacturing  business. 

ESTIMATED  INVENTORIES — If  perpetual  inventories  cannot  be  had,  it  is 
feasible  in  some  cases  to  approximate  the  amount  of  the  inventory  with  sub- 
stantial accuracy.   The  most  common  method  is  illustrated  below  and  is  re- 
ferred to  as  the  "gross  profit"  method. 

-A- 
.NET  SALES  (actual)  $20,000.00 

D3DUCT--Gross  Profit  (based  on  estimated  percentage  of 

net  sales,  say  40^)  8,000.00 


BALANCE—ESTIMATED  COST  OF  SALES  $12,000.00 


-B- 
INVENTORY  at  beginning  of  period  $  5,000.00 

ADD~Purchases  (actual)  16,000.00 


$21,000.00 
DEDUCT— Estimated  Cost  of  Sales  (as  above)  12,000.00 


Balance— ESTIMATED  INVENTORY  at  close  of  period  $  9,000.00 


The  estimated  inventory  at  the  close  of  the  period  is  verified  by  taking  a 
physical  inventory. 

The  foregoing  method  may  be  used  to  advantage  where  the  ratio  of  gross 
profit  to  sales  varies  but  little  from  month  to  month.  Where  the  ratio 
fluctuates,  the  result  is  apt  to  be  erroneous. 

REFERENCES : 

Bays  (AmericEin  Commercial  Law  Series,  Vol.  II) 
Cole,  pages  118-120 
Dickinson,  pages  93-99 
Esquerre,  pages  165-172 
Oilman,  pages  167-178 


Copyright,  1917,  The  Ronald  Press  Company 


1-13-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  13 

POINTS  INVOLVED  IN  CLOSING  BOOKS 


Problem  12 

The  trial  balance  following  is  from  the  ledger  of  John  Hand,  real  estate 
and  insurance  agent : 


TRIAL  BALANCE,  DECEMBER  31,  1917 

John  Hand — Capital  Account,  January  1,  1917 

John  Hand — Drawing  Account 

Apartment  House 

North  Park  Subdivision 

Personal  Ledger 

Cash 

Mortgage  Payable 

Aetna  Insurance  Company 

Continental  Insurance  Company 

Oriental  Casualty  Company 

North  Park  Subdivision  Sales 

Apartment  House  Rent 

Apartment  House  Expense 

Commission  on  Rentals 

Commission  on  Real  Estate  Sales 

Commission  on  Insurance 

Office  Expenses 

Office  Rent 

Advertising 

Interest  on  Mortgage 

Commission  Paid  Sub-Agents  on  Subdivision  Sales 


$  2,100.00 
60,000.00 
21,000.00 

500.00 


1,900.00 


1,100.00 
600.00 
400.00 
900.00 

2,000.00 


$24,500.00 


1,800.00 

30,000.00 

150.00 

50.00 

200.00 

19,200.00 

8,000.00 

800.00 
4,600.00 
1,200.00 


190,500.00  $90,500.00 


Hand  owns  the  apartment  house  on  which  the  $30,000  mortgage  applies.   All 
rent  thereon  is  credited  to  Apartment  House  Rent  account,  and  all  expenses  are 
charged  to  Apartment  House  Expense  account.   Rent  accrued  and  not  paid  Decem- 
ber 31,  1917,  amounts  to  $400  and  is  collectible.   There  is  also  $900  interest 
accrued  and  due  on  the  mortgage  but  not  paid.   Neither  of  these  items  appears 
on  the  books  as  yet. 

Hand  also  owns  the  North  Park  Subdivision.   The  original  cost  and  the  cost 
of  all  subsequent  improvements  have  been  charged  to  North  Park  Subdivision 
account.  There  are  21  lots  of  equal  value;  11  of  these  have  been  sold  and  the 
sales  price  credited  to  North  Park  Subdivision  Sales  account. 


Copyright,  1917,  The  Ronald  Press  Company 


1-13-2 
The  amounts  due  insurance  companies  are  on  premiums  collected  but  not  yet 
remitted.   The  entry  in  the  cash  book  on  the  collection  of  a  premium  is  as 
follows: 

Cash  $60.00 

To — Aetna  Insurance  Company  $48.00 

Commission  on  Insurance  12.00 

The  personal  ledger  is  a  card  ledger  containing  both  debtors*  and  cred- 
itors' accounts.   The  debtors  amount  to  $600  and  the  creditors  to  $2,400. 
You  are  required  to  submit: 

(a)  Balance  sheet  as  of  December  31,  1917. 

(b)  Statement  of  profit  and  loss  for  year  ending  December  31,  1917. 

(c)  Journal  entries  to  close  the  ledger  at  December  31,  1917. 


MISCELLANEOUS  QUESTIONS 

Question  30 — How  would  you  proceed  to  locate  errors  in  a  trial  balance? 
Outline  the  various  tests  you  would  make. 

Question  31 — The  firm  of  A  and  B  has  for  several  years  valued  its  mer- 
chandise inventory  on  the  basis  of  sales  prices.   If  the  stock  of  merchandise 
at  the  close  of  each  of  these  periods  was  approximately  of  the  same  kind  and 
value,  what  effect  would  this  procedure  have  on  the  successive  balance  sheets 
prepared?  On  the  successive  statements  of  profit  and  loss? 

Question  32 — The  firm  of  C  and  D  on  June  30,  1917,  in  taking  its  annual 
inventory  discovered  that  whereas  the  merchandise  on  hand  cost  $50,000,  not 
more  than  $30,000  could  be  realized  therefrom  at  that  date  on  account  of  a 
sudden  fall  in  the  market  price.  Purchases  during  the  year  amounted  to 
$150,000,  the  value  (at  cost)  of  the  opening  inventory  was  $40,000,  and  the 
sales  for  the  period  were  $155,000.   The  firm  figures  that  a  gross  profit  of 
$15,000  has  been  made  on  the  goods  sold,  but  this  figure  will  be  turned  into  £ 
gross  loss  of  $5,000  if  in  the  cost  of  sales  statement  the  closing  inventory 
is  taken  at  the  realizable  value  of  $30,000. 

What  should  be  done  under  the  circumstances? 


WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

Having  made  the  adjusting  entries  called  for  in  1-12-3,  post  the  books  of 
original  entry  and  submit  a  trial  balance. 


Copyright,  1917,  The  Ronald  Press  Company 


1-13-3 


Solution  to  Problem  10 


A.  R.  MILES  &  CO. 
BALANCE  SHEET,  OCTOBER  31,  1917 


ASSETS 
CURRENT  ASSETS: 

Cash  $14,759.69 

Accounts  Re- 
ceivable     10,209.48  $24,969.17 


PREPAID  EXPENSE: 

Insurance 
CAPITAL  ASSETS: 

Furniture  and 
Fixtures 


586.00 


2,000.00 


$27,555.17 


LIABILITIES 
CURRENT  LIABILITIES: 
Accounts  Pay- 
able      $   $125.40 
Due  on  Con- 
signment not 
closed  out     1,490.68  $1,616.08 


CAPITAL  ACCOUNT: 
Balance,  Oct. 

1,  1917     $25,442.61 
Profits  for 

October         496.48  25,939.09 


$27,555.17 


A.  R.  MILES  &  CO. 

STATEMENT  OF  PROFIT  AND  LOSS 

MONTH  ENDING  OCTOBER  31,  1917 


Commissions  Earned 

$1,570.02 

Operating  Expenses: 

Salaries 

$575.00 

Rent 

200.00 

Insurance 

65.00 

General  Expense 

233.54 

1,073.54 

Net  Profit  (as  above) 


$  496.48 


Copyright,  1917,  The  Ronald  Press  Company 


1-13-4 

POINTS  INVOLVED  IN  CLOSING  BOOKS 
METHOD — Four  methods  of  closing  the  books  of  a  trading  concern  have  al- 
ready been  illustrated: 

1.  Where  a  Merchandise  account  and  Profit  and  Loss  account  are  kept  (there 
being  no  separate  inventory  account),  the  inventory  at  the  end  of  the  period 
is  credited  direct  to  the  Merchandise  account,  and  the  balance,  representing 
gross  profit,  is  carried  to  the  Profit  and  Loss  account  together  with  all 
other  nominal  accounts  ;  the  net  profit  is  then  carried  to  the  respective  draw- 
ing accounts  ;  and  the  excess  of  the  net  profits  over  the  drawings  is  carried 
to  the  capital  accounts.   (See  1-5-5.) 

2.  If  the  merchandise  inventory  is  carried  in  a  separate  ledger  account, 
it  is  necessary  to  transfer  the  opening  inventory  from  the  Inventory  account 
to  the  Merchandise  account.  The  closing  inventory  when  taken  upon  the  books 
will  be  charged  to  the  Inventory  account  at  the  same  time  that  the  credit  is 
made  to  the  Merchandise  account.   (See  1-6-4.) 

3.  Where  the  Merchandise  account  is  subdivided  into  its  elements  of  Inven-- 
tory.  Purchases,  Sales,  etc.,  one  method  of  procedure  is  to  open  up  a  Cost  of 
Sales  account,  into  which  the  opening  inventory,  closing  inventory,  and  pur- 
chases are  carried.  The  balance  is  the  cost  of  merchandise  sold,  which  may  be 
carried  to  (a)  Sales  account,  or  (b)  Trading  account,  or  (c)  to  the  Profit  and 
Loss  account.  (See  1-10-5.)  Sales  would  be  transferred  to  Trading  account  in 
case  (b)  and  to  Profit  and  Loss  account  in  case  (c). 

4.  Where  the  Merchandise  account  is  subdivided  into  its  elements  of  Inven- 
tory, Purchases,  Sales,  etc.,  a  common  method  of  procedure  is  to  open  up  a 
Trading  account  into  which  all  these  merchandise  accounts  are  transferred. 
The  balance  will  be  gross  profit  from  trading  to  be  carried  to  Profit  and  Loss, 
similar  to  the  balance  of  Merchandise  account  in  method  1.   (See  1-12-6.) 

A  fifth  method  is  sometimes  used:  all  nominal  accounts  are  closed  by  a 
single  journal  entry  into  the  proprietor's  drawing  account,  no  Trading  account 
or  Profit  and  Loss  account  appearing  on  the  ledger.   In  this  instance,  the 
proprietor  would  depend,  for  an  analysis  of  his  profits  during  any  given 
period  or  for  a  comparison  between  profits  of  successive  periods,  not  on  the 
financial  records  themselves  but  on  the  financial  statements  prepared  at  the 
end  of  each  period.   There  is  also  no  distinction  drawn  between  items  making 
up  cost  of  sales  and  items  which  compose  operating  expenses,  etc.   The  method 
is  disfavored  by  accountants  generally. 

CLEARING  ACCOUNTS — The  Trading  account.  Cost  of  Sales  account,  and  Profit 
and  Loss  account  are  often  called  CLEARING  ACCOUNTS,  inasmuch  as  they  are 
opened  and  closed  only  at  the  end  of  each  accounting  period  and  serve  to  clear 
various  elements  of  profits  from  particular  nominal  accounts  to  others. 

CLASSIFICATION  OF  ENTRIES— Since  new  types  of  entries  have  arisen  in  con- 
nection with  closing  the  books,  it  is  desirable  to  outline  them  here  more 
fully. 

1.  ENTRIES  FOR  TRANSACTIONS.   These  are  the  entries  made  during  the  period 
concerning  the  relations  of  the  business  to  outsiders:  purchases,  sales,  pay- 
ments on  accounts,  expenses,  etc. 

2.  ADJUSTING  ENTRIES.  A  distinction  should  be  made  between  adjusting  and 
closing  entries.   The  former  precede  and  are  made  for  the  purpose  of  restating 
certain  assets  and  liabilities  for  balance  sheet  purposes. 

Copyright,  1917,  The  Ronald  Press  Company 


1-13-5 

3.  CLOSING  ENTRIES.   Closing  entries  are  the  entries  necessary  at  the  end 
of  an  accounting  period  for  the  purpose  of  transferring  the  nominal  accounts, 

4.  REVERSING  ENTRIES.   The  term  "reversing  entries"  refers  particularly  to 
entries  that  may  be  made  at  the  beginning  of  a  fiscal  period  which  reverse 
certain  entries  made  at  the  end  of  the  period  just  closed.   Thus,  Inventory  of 
Miscellaneous  Supplies  account  may  be  written  back  to  the  expense  accounts, 
the  inventories  of  which  it  represents  ;  likewise  Interest  Accrued  on  Notes  Re- 
ceivable in  the  second  method  outlined  (see  1-10-8  to  9)  ;  sometimes  Merchan- 
dise Inventory  is  closed  back  into  Merchandise  account. 

5.  CORRECTING  ENTRIES.   When  it  is  necessary  to  alter  accounts  because  of 
errors  in  recording  transactions  referring  thereto,  the  entries  required  are 
termed  "correcting"  entries.   The  last  four  classes  of  entries  record  no 
transactions,  their  purpose  being  to  put  the  accounts  on  a  proper  accounting 
basis. 

"CLOSING  THE  BOOKS* — This  term  may  refer  to  one  of  three  things: 

1.  Closing  the  nominal  accounts  at  the  end  of  an  accounting  period* 

2.  Closing  a  set  of  accounts  to  be  transferred  to  another  ledger. 

3.  Closing  out  the  accounts  of  a  liquidated  or  defunct  business  or  of 

a  business  whose  accounts  are  transferred  to  another  business. 

REASON  FOR  CLOSING  THE  BOOKS  AT  THE  END  OF  A  FISCAL  PERIOD 
Nominal  accounts  have  been  referred  to  as  subdivisions  of  the  proprietor- 
ship accounts.   They  are  kept  during  a  fiscal  period  for  the  purpose  of  dis- 
closing the  sources  and  details  of  the  profits  and  expenses  during  that 
period.   They  serve  also  the  purpose  of  showing  the  increases  or  decreases  of 
proprietorship;  but  this  increase  may  be  indicated  as  well  by  single  entry 
where  no  nominal  accounts  are  kept. 

WHAT  REMAINS  ON  BOOKS  AFTER  CLOSING— Only  real  accounts,  i.e.,  balance 
sheet  accounts,  remain  on  the  books  after  closing,  the  valuation  of  which  is 
arrived  at  as  follows: 

1.  Capital  assets  at  their  cost  less  accrued  depreciation  (the  subject 

of  depreciation  will  be  taken  up  later). 

2.  Current  assets  at  not  more  than  their  realizable  value,  (i.e., 

realizable  value  to  the  "going  concern"). 

3.  Prepaid  expenses  benefiting  future  periods,  at  cost. 

4.  Liabilities  on  the  basis  of  items  ACCRUED  (no  matter  whether  due  or 

not) . 

5.  The  proprietor's  account  represents  the  difference  between  the  as- 

sets and  liabilities  thus  arrived  at. 
The  purpose  of  this  brief  summary  of  balance  sheet  accounts  is  to  remind 
the  student  that  the  term  VALUE  in  Accounting  as  applied  to  real  accounts  has 
a  meaning  entirely  distinct  from  the  same  term  as  used  in  other  sciences.   The 
value  of  a  business  on  a  liquidating  basis  would  differ  from  the  value  of  the 
same  business  as  a  going  concern ;  while  both  may  differ  from  the  value  (net 
worth  or  proprietor's  account)  appearing  on  the  firm's  books. 

REFERENCES : 

Cole,  Chapter  V 
Gilman,  Chapter  IV 

Copyright,  1917,  The  Ronald  Press  Company 


1-14-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  14 

GENERAL  REVIEW  QUESTIONS 

(For  oral  quiz) 


Question  33 — Distinguish  between  single  and  double  entry. 

Question  34 — Give  the  entries  necessary  to  change  a  set  of  books  from 
single  entry  to  double  entry. 

Question  35 — How  would  you  determine  the  profit  or  loss  for  a  given 
period,  (a)  from  single  entry  books  ;  (b)  from  double  entry  books? 

Question  36 — Distinguish  between  capital  and  revenue  expenditures  and  give 
illustrations  of  each.  Why  is  so  much  stress  laid  on  the  correct  classifica- 
tion of  expenditures? 

Question  57 — What  are  the  objections  to  the  "Merchandise"  account?  In 
your  opinion,  what  is  the  best  method  of  recording  the  information  usually 
contained  in  the  Merchandise  account? 

Question  38 — What  is  a  petty  cash  fund?  You  are  instructed  to  set  aside 
$100  as  a  petty  cash  fund;  give  the  entries  to  be  made. 

Question  39 — Without  using  amounts,  submit  a  specimen  balance  sheet  such 
as  you  would  prepare  for  a  partnership  engaged  in  an  industrial  line  of  busi- 
ness. 

Question  40 — Distinguish  between  trade  and  cash  discounts.   Show  several 
methods  of  entering  them  on  the  books. 

Question  41 — Distinguish  between  interest,  cash  discount,  and  bank  dis- 
count. 

Question  42 — Give  the  entries  you  would  make  in  case  a  note  which  had  been 
given  you  by  a  customer  is  dishonored. 

Question  43 — What  are  the  advantages  of  having  Purchases  and  Sales  ac- 
counts in  subsidiary  ledgers,  and  what  is  the  best  method  of  checking  the  ac- 
curacy of  the  postings  to  these  accounts? 

Question  44— What  is  the  best  method  of  handling  C.  0.  D.  shipments  where 
the  consignee  does  not  have  a  regular  ledger  account? 
.   .  • —  :  c  .  ■  . 

Question  45 — Define  a  note.  Give  the  parties  to  a  note. 

Copyright,  1917,  'jJie  Ronald  Press  Company 


1-14-2 
Question  46 — Define  a  bill  of  exchange.   Give  the  parties  to  such  an  in- 
strument . 

Question  47 — Distinguish  between  the  following  instruments: 

(a)  Note 

(b)  Bill  of  Exchange 

(c)  Sight  Draft 

(d)  Time  Draft 

(e)  Bank  Draft 

(f)  Check 

Question  48 — Give  the  required  entries  to  be  made  when: 

(a)  Our  note  is  given  to  a  creditor  in  payment  of  what  we  owe. 

(b)  A  note  is  received  from  a  customer  in  payment  of  his  account. 

(c)  When  (b)  is  dishonored  at  maturity. 

Question  49 — Give  the  entries  required  when  we  discount: 

(a)  A  note  which  we  have  received  from  a  customer. 

(b)  Our  own  note. 

Question  50 — Give  the  required  entries: 

(a)  When  you  accept  a  time  draft  drawn  upon  you  by  a  creditor, 

(b)  When  you  draw  a  time  draft  on  a  customer,  which  he  accepts. 

(c)  When  you  draw  a  sight  draft  on  a  customer. 

Question  51 — What  is  a  controlling  account?  Give  the  items  which  would 
appear  in  the  customers'  and  creditors'  controlling  accounts,  respectively. 

Question  52 — Draw  up  a  partnership  agreement,  incorporating  such  features 
as  you  deem  desirable  for  a  proper  guide  to  the  partners. 

Question  55 — Where  articles  of  partnership  do  not  state  the  proportion  of 
profits  each  partner  is  to  receive,  on  what  basis  are  they  divided? 

Question  54 — If  the  profits  are  to  be  divided  on  the  basis  of  amount  of 
capital  and  length  of  time  invested,  how  would  you  ascertain  what  proportion 
of  the  profits  each  partner  is  entitled  to? 

Question  55 — What  is  the  distinguishing  feature  between  a  consignment  and 
a  sale?  Give  several  reasons  for  making  consignments. 

Question  56 — What  are  capital  assets;  current  assets;  floating  assets; 
liquid  assets;  quick  assets;  fixed  assets?  Give  examples  of  each.  What  dif- 
ference, if  any,  is  there  between  them? 

What"  are  capital  liabilities;  fixed  liabilities;  current  liabilities; 
floating  liabilities  ?  Give  examples  and  state  what  difference,  if  any,  there 
Is  between  them. 

Question  57 — On  what  basis  should  an  inventory  be  valued?  Give  your  rea- 
sons. 

Copyright,  1917,  The  Ronald  Press  Con^pany 


1-14-3 
WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

The  merchandise  inventory  at  the  beginning  of  the  period  (March  1)  was  di- 
vided as  between  automobiles  ^8,000,  and  accessories  and  supplies  $2,890,  -On 
April  30,  the  inventory  was  composed  of  automobiles  $30,000  and  accessories 
and  supplies  $5,890. 

Prepare  and  submit  a  balance  sheet  and  statement  of  profits  and  income 
(report  form) ,  covering  the  two  months  ending  April  30,  and  close  the  books. 


Solution  to  Assignment  1-13-2 

SCHEDULE  OF  CUSTOMERS  LEDGER  ACCOUNTS 

C.  0.  D.  (   110.00 

E.  T.  Adams  14,000.00 

Barnhart  and  Co.  12,312.00 

Frank  Rice  7,120.00 

George  Wilson  2,000.00 


Total  per  Customers  Ledger  Accounts  in  General  Ledger   $35,542.00 


SCHEDULE  OF  CREDITORS  LEDGER  ACCOUNTS 

New  York  Auto  Supply  Co.  $29,500.00 

Well-Built  Auto  Co.  5,000.00 

Star  Auto  Co.  1,580.00 


Total  per  Creditors  Ledger  Accounts  in  General  Ledger   $36,080.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-14-4 


MILLER  BROS.— TRIAL  BALANCE,  APRIL  30,  19— 
Warehouse  and  Office  Fixtures  $  1,450.00 

Delivery  Equipment  1,750.00 

Inventory  of  Merchandise  10,890.00 

Consignment  Stock  Outward  3,200.00 

Miscellaneous  Supplies  300.00 

Advances  on  Consignments-Inward  1,100.00 

Customers  Ledger  35,542.00 

Notes  Receivable  10,100.00 

Cash  3,676.84 

Petty  Cash  Fund  100.00 

Unexpired  Insurance  50.00 

Rent  Paid  in  Advance  200.00 
Creditors  Ledger 
Notes  Payable 
Bank  Loan 

Notes  Receivable  Discounted 
Taxes  Accrued 

Interest  Accrued  on  Notes  Payable 
Fred  Miller — Capital  Account 
Aug.  Miller — Capital  Account 

Fred  Miller — Drawing  Account                  "  210.00 
Auto  Sales 

Auto  Return  Sales  2,000.00 

Auto  Rebates  and  Allowances  on  Sales  200.00 

Auto  Freight-Out  85.00 
Accessories  and  Supplies  Sales 

Accessories  and  Supplies  Return  Sales  1,710.00 
Accessories  and  Supplies  Rebates  and  Allowances  on  Sales    10.00 

Accessories  and  Supplies  Freight-Out  100.00 
Profits  on  Consignments-Outward 
Earnings  on  Consignments- Inward 
Discount  on  Purchases 
Interest  Received 

Auto  Purchases  47,800.00 

Auto  Freight-In  500.00 

Accessories  and  Supplies  Purchases  55,570.00 

Accessories  and  Supplies  Freight-In  360.00 
Accessories  and  Supplies  Return  Purchases 

Rent  200.00 

Taxes  200.00 

Insurance  Expense  10.00 

Office  Salaries  and  Expenses  5,495.00 

General  Expense  162.00 

Delivery  Expenses  878.00 

Advertising  5,150.00 

Salesmen's  Salaries  and  Commissions  10,840.00 

Salesmen's  Traveling  Expenses  300.00 

Miscellaneous  Selling  Expenses  1,544.00 

Interest  Paid  178.00 

Discount  on  Sales  504.00 


$36,080.00 

10,000.00 

3,000.00 

10,000.00 

200.00 

36.00 

15,000.00 

15,000.00 

42,312.00 


60,165.00 


3,200.00 

2,820.00 

864.50 

87.34 


3,600.00 


$202,364.84  $202,364.84 


Copyright,  1917,  The  Ronald  Press  Company 


1-14-5 
Solution  to  Problem  11 

X  Z  COMPANY 
METHOD  OF  ESTIMATING  INVENTORIES  AT  SEPTEMBER  30,  1917 
GROSS  SALES  $44,500.00 

LESS — Freight-Out  $1,200.00 

Allowances  2,360.00    3,560.00 


NET  SALES  $40,940.00 

DEDUCT — Estimated  Gross  Profit  of  35%  of  Net  Sales  14,329.00 


Balance — ESTIMATED  COST  OF  SALES  $26,611.00 


Inventory  at  January  1,  1917  $  6,100.00 

ADD — Purchases  $28,450.00 

Freight-In  895.00 


$29,345.00 
Less — Discount  on  Purchases  960.00   28,385.00 


Total  Merchandise  Cost  $34,485.00 

DEDUCT — Estimated  Cost  of  Sales  26,611.00 


Balance— ESTIMATED  INVENTORY  at  September  30,  1917  $  7,874.00 

ANSWERS  TO  QUESTIONS 
Answer  to  Question  27 — 

(a)  Enter  the  cash  in  the  cash  receipts  book,  at  the  same  time  crediting 
the  departmental  sales  accoionts  in  the  general  ledger. 

(b)  Enter  the  cash  in  the  cash  receipts  books,  which  is  to  be  posted  to 
Cash  Sales  account  in  the  customers  ledger.  At  the  same  time  make  an  entry  in 
the  sales  book  debiting  "Cash  Sales"  account  in  the  customers  ledger,  cred- 
iting the  proper  department  as  in  the  case  of  a  "charge"  sale. 

(c)  Same  as  No.  2,  except  that  instead  of  carrying  a  customers  ledger  ac- 
count for  Cash  Sales,  the  items  of  cash  sales  in  the  cash  book  and  cash  sales 
in  the  sales  book  are  merely  checked  against  each  other. 

Separate  columns  may  be  provided  in  the  cash  receipts  book  and  sales  book 
for  cash  sales,  the  totals  of  which  are  posted  to  the  credit  and  debit,  re- 
spectively, of  a  Cash  Sales  account  in  the  general  ledger. 

Answer  to  Question  28 — 

(a-l)  C.  0.  D.  sales  may  be  handled  as  cash  sales — only  a  memorandum  rec- 
ord being  kept  of  C.  0.  D. 's  as  they  are  forwarded  to  the  customer  and  no 
credit  being  taken  for  the  sale  until  the  cash  has  been  received. 

(a-2)  Charge  C.  0.  D.  sales  to  a  C.  0.  D.  account  in  the  customers  ledger 
which  is  then  credited  as  the  cash  is  received. 

(a-3)  Charge  directly  to  the  customer's  account. 

(b)  Rather  than  open  up  a  separate  account  for  such  customers,  a  single 
ledger  page  in  the  customers  ledger  may  be  headed  "Sundry  Customers"  and  such 
items  posted  thereto.  When  one  of  these  customers  pays  his  account,  the 
credit  should  be  entered  in  the  space  directly  opposite  the  charge. 

Copyright,  1917,  The  Ronald  Press  Company 


1-14-6 
Answer  to  Question  29 — Selling  expenses  are  those  ex^ienses  of  a  business 
which  are  incurred  in  selling  the  product  manufactured  or  purchased,  and 
usually  are  represented  by: 

Salesmen's  Salaries  and  Commissions 

Traveling  Expenses  of  Salesmen 

Samples  Distributed 

Advertising 

Salaries  of  Sales  Management 

Salaries  and  Expenses  of  Credit  Department 

Sales  Office  Expenses 

Freight  allowances  in  the  nature  of  "special  inducements"  to  secure  cus- 
tomers may  be  treated  as  a  selling  expense  ;  but  if  such  item  represents  a 
regular  yearly  allowance  and  is  not  the  result  of  a  special  advertising  cam- 
paign, etc.,  it  is  treated  as  a  deduction  from  gross  sales.   Trade  discounts 
are  always  deductions  from  gross  sales. 

General  and  administrative  expenses  are  those  expenses  of  a  business  In- 
curred in  its  general  administration,  such  as: 

Officers'  Salaries 

Office  Salaries 

Office  Expenses — Stationery  and  Supplies,  etc. 

Telephone  and  Telegraph 

Legal  Expenses 

Traveling  Expenses  of  Officers 

Heat  and  Light — Office 

Repairs  to  Office  Building 

Repairs  to  Furniture  and  Fixtures 

Taxes 

Insurance 


Copyright,  1917,  The  Ronald  Press  Company 


1-15-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  15 
ANSWERS  TO  GENERAL  REVIEW  QUESTIONS 


Solution  to  Problem  12 


JOHN  HAND 
BALANCE  SHEET,  DECEMBER  31,  1917 


ASSETS 
CAPITAL  ASSETS: 
Apartment  House 

CURRENT  ASSETS: 

North  Park  Sub- 
division   $10,000.00 

Accounts  Re- 
ceivable       600.00 


$60,000.00 


CAPITAL  AND  LIABILITIES 
CAPITAL  ACCOUNT: 

Balance,  January  1,  1917  $24,500.00 
Profit  for  year  as 
below 


Drawings 


15,400.00 

$39,900.00 
2,100.00 


Rents  Un- 

Balance, 

December  31, 

collected 

400.00 

1917 

$37,800.00 

Cash 

m 

500.00 

11,500.00 

MORTGAGE 

30,000.00 

$71,500.00 


CURRENT  LIABILITIES: 

Accounts 

Payable      $2,400.00 

Due  Insurance 

Cos.  400.00 

Interest  Ac- 
crued 900.00 


3,700.00 
$71,500.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-15-2 

JOHN  HAND 
STATEMENT  OF  INCOME  AND  EXPENDITURES 
YEAR  ENDING  DECEMBER  31,  1917 
INCOME : 

Apartment  House  Rent  $  8,400.00 

Deduct — Apartment  House  Expense  1,900.00  $  6,500.00 


Sales  of  North  Park  Subdivision  Lots  $19,200.00 

Deduct — Cost  of  Lots  Sold  $11,000.00 

Commissions  Paid  Subagents        2,000.00   13,000.00    6,200.00 


Commission  on  Real  Estate  Sales  4,600.00 

Commission  on  Insurance  1,200.00 

Commission  on  Rentals  800.00 


TOTAL  INCOME  $19,300.00 

EXPENDITURES: 

Office  Expenses  $1,100.00 

Office  Rent  600.00 

Advertising  400.00    2,100.00 


NET  INCOME  before  deducting  Interest  $17,200.00 

DEDUCT — Interest  on  Mortgage  1,800.00 


SURPLUS  NET  INCOME  (as  above)  $15,400.00 


JOURNAL  ENTRIES  TO  CLOSE  LEDGER,  DECEMBER  31,  1917 

(1) 

Rent  Unpaid  $   400.00 

To — Apartment  House  Rent  $   400.00 

To  record  rent  due  and  unpaid. 

(2) 
Interest  on  Mortgage  900.00 

To — Interest  Accrued  on  Mortgage  900.00 

To  take  up  interest  accrued  and  unpaid. 

(3) 

Apartment  House  Rent  1,900.00 

To — Apartment  House  Expense  1,900.00 

To  transfer  apartment  house  expense  to  rent 
account  (the  latter  account  now  shows  the 
income  from  the  apartment  house.) 

.    (4) 
North  Park  Subdivision  Sales  13,000.00 

To — North  Park  Subdivision  11,000.00 

Commissions  Paid  Subagents  2,000.00 

To  transfer  cost  of  subdivision  sales. 

Copyright,  1917,  The  Ronald  Press  Company 


1-15-3 


(5) 

Apartment  House  Rent 
North  Park  Subdivision  Sales 
Commission  on  Rentals 
Commission  on  Real  Estate  Sales 
Commission  on  Insurance 

To — Profit  and  Loss 
To  transfer  income  to  Profit  and  Loss. 


$  6,500.00 

6,200.00 

800.00 

4,600.00 

1,200.00 


$19,300.00 


(6) 
Profit  and  Loss  3,900.00 

To — Office  Expenses 
Office  Rent 
Advertising 
Interest  on  Mortgage 
To  transfer  expense  account  to  Profit  and  Loss. 


1,100.00 
600.00 
400.00 

1,800.00 


(7) 
Profit  and  Loss 

To — John  Hand — Drawing  Account 
To  close  out  net  income  for  year. 


15,400.00 


15,400.00 


(8) 
John  Hand — Drawing  Account 

To — John  Hand — Capital  Account 
To  close  out  balance  of  Drawing  account. 


13,300.00 


13,300.00 


ANSWERS  TO  QUESTIONS 
Answer  to  Question  30 — 

1.  Check  the  footings  of  the  trial  balance. 

2.  Check  transfer  of  balances  from  ledger  to  trial  balance. 

3.  If  the  diffence  is  "1"  in  any  column  it  is  probably  an  error  In 

footing. 

4.  Ascertain  whether  any  account  appearing  in  the  trial  balance  has 

been  closed  out  during  the  month. 

5.  Ascertain  whether  an  item  equal  to  one-half  the  discrepancy  has 

been  posted  to  the  wrong  side  of  the  ledger. 

6.  Look  for  an  error  in  posting  caused  by  a  transposition  or  trans- 

placement  of  figures  (divide  the  difference  by  9  or  a  multiple 
thereof). 

7.  Check  footings  of  ledger  accounts  and  books  of  original  entry. 

8.  These  tests  having  been  made,  it  is  likely  that  the  error  arises 

from  an  item  not  posted  or  posted  incorrectly.   If  it  seems  nec- 
essary to  review  the  postings  for  the  period,  it  is  usually  pref- 
erable to  check  or  call  back  the  postings  from  the  ledger  into 
the  books  of  original  entry. 

Answer  to  Question  31 — The  effect  of  this  procedure  on  the  balance  sheet 
has  been  to  overstate  continuously  the  assets  and  net  worth.  If  the  value  of 
the  inventory  remained  practically  the  same  from  year  to  year,  the  profits  for 
any  one  year  would  be  substantially  correct. 


Copyright,  1917,  The  Ronald  Press  Company 


1-15-4 
Answer  to  Question  32 — The  cost  price  will  be  placed  on  the  inventory- 
sheets  and  the  total  inventory  thus  arrived  at  carried  as  a  credit  to  the 
Trading  account  and  as  a  debit  to  the  Inventory  account  in  the  usual  way.   If 
the  fall  in  market  price  would  affect  the  probable  selling  price,  it  would  be 
desirable  to  set  up  a  "Reserve  for  Estimated  Shrinkage  in  Value  of  Inven- 
tories" by  debiting  Profit  and  Loss  and  crediting  the  reserve  account  for  the 
estimated  decrease  in  value.   The  operation  of  a  reserve  account  will  be  shown 
later.   It  may  be  stated  here,  however,  that  on  the  balance  sheet  the  reserve 
will  be  deducted  from  the  cost  value  of  the  inventory,  while  the  same  amount 
charged  to  Profit  and  Loss  will  be  shown  on  the  statement  of  profits  and  in- 
come as  an  extraordinary  loss  for  the  period  (deducted  from  Net  Profits)  and 
will  not  be  confused  with  gross  profits,  which  in  the  example  cited  will  be 
shown  as  $15,000. 

ANSWERS  TO  GENERAL  REVIEW  QUESTIONS 

Answer  to  Question  33 — In  single  entry  only  the  debit  or  credit,  i.e., 
only  one  posting,  is  made  for  each  transaction.   In  double  entry  there  must  be 
a  DEBIT  FOR  EVERY  CREDIT  and  two  postings  must  be  made  in  the  ledger  for 
every  transaction  in  order  to  balance  the  books.   In  single  entry,  a  trial 
balance  cannot  be  drawn  off  to  prove  the  accuracy  of  the  work  as  in  the  case 
of  double  entry.   In  single  entry,  record  is  kept  usually  of  only  the  personal 
accounts  ;  in  double  entry  a  record  is  kept  of  every  element  of  the  business. 

Answer  to  Question  34 — Prepare  a  statement  of  the  assets  and  liabilities 
ascertained  from  all  sources  available.   Then  make  a  journal  entry — 

Assets  (in  detail)  $ 

To — Liabilities  (in  detail)  $ 

Capital  Account  

or  make  two  entries,  viz.: 

Assets  (in  detail)  

To — Capital  Account  — 


Capital  Account  

To — Liabilities  (in  detail) 

The  balance  in  the  capital  account  represents 
the  net  worth  of  the  proprietor. 

Answer  to  Question  35— 

(a)  By  the  asset  and  liability  method.  A  schedule  of  assets  and  liabili- 
ties at  the  end  of  the  period  is  prepared  from  all  available  sources.   The 
difference  between  them  is  the  net  worth  or  net  insolvency  at  that  date.  A 
similar  statement  prepared  as  of  the  beginning  of  the  period  will  show  the 
net  worth  or  net  insolvency  at  that  time.   Any  change  in  the  conditions  as 
shown  by  these  statements  must  have  been  caused  either  by: 

1.  Money  put  in  or  withdrawn  by  the  proprietor. 

2.  Profits  or  losses  made  by  the  business. 

Copyright,  1917,  The  Ronald  Press  Company 


1-15-5 

The  following  form  can  be  used  to  ascertain  the  net  profit  or  loss  for  any- 
period: 


NET  WORTH  at  the  end  of  the  period 

NET  WORTH  at  the  beginning  of  the  period 

Balance — being  increase  or  decrease  in  Net  Worth 
ADD — Drawings 


DEDUCT — Additional  Capital  Contributed 
Balance~NET  PROFIT  OR  LOSS  for  the  period 


(b)  To  find  the  net  profit  or  loss  from  a  double  entry  set  of  books,  as- 
certain: 

1.  Inventory  of  merchandise  on  hand,  supplies,  etc.,  at  "cost  or  mar- 

ket, whichever  is  the  lower." 

2.  Unexpired  insurance. 

3.  Prepaid  rent. 

4.  Interest  accrued  on  notes  receivable  ;  also  on  notes  payable  and 

bonds  outstanding. 

5.  Make  due  provision  for  uncollectible  accounts. 

6.  Make  proper  allowance  for  depreciation  of  capital  assets. 

When  the  inventories  have  been  prepared  and  all  accrued  income  and  ex- 
penses are  ascertained,  make  journal  entries  to  record  same  in  the  books. 

Now  close  all  the  nominal  accounts  into  the  Profit  and  Loss  account. 
Transfer  the  balance  in  the  Profit  and  Loss  account  to  the  Drawing  account  of 
the  proprietor,  in  case  of  a  single  proprietorship;  to  the  Drawing  accounts  of 
the  partners  in  the  proportion  stipulated  by  their  articles  of  copartnership, 
in  case  of  a  partnership;  to  the  Surplus  account,  in  case  of  a  corporation. 
Then  close  the  Drawing  accounts  into  the  Capital  accounts  in  the  case  of  both 
single  proprietorship  and  partnership. 

Answer  to  Question  36 — Capital  expenditures  are  those  incurred  in  the  ac- 
quisition of  assets  of  a  permanent  nature  or  additions  thereto,  not  intended 
for  sale;  such  as  buildings,  fixtures,  etc.   They  must  be  for  the  purpose  of 
increasing  the  earning  capacity  of  the  business  and  not  mere  replacements  of 
old  assets  worn  out. 

Revenue  expenditures  are  those  incurred  in  the  operation  of  a  business  In 
connection  with  the  earning  of  revenue,  or  to  maintain  the  capital  assets  in 
a  state  of  efficiency,  such  as  labor,  material,  salaries,  etc. 


Copyright,  1917,  The  Ronald  Press  Company 


1-15-6 
The  distinction  between  capital  and  revenue  expenditures  is  very  impor- 
tant.  The  former  is  an  asset;  the  latter  an  expense.   To  classify  a  revenue 
expenditure  item  as  a  capital  expenditure  will  affect  the  profits  by  an  amount 
equal  to  the  item  wrongly  classified.   For  instance,  if  a  purchase  of  $100  is 
made  to  replace  a  worn-out  typewriter,  and  the  purchase  is  charged  to  the  fix- 
ture account,  the  profits  are  overstated  $100,  because  the  assets  are  in- 
creased $100  and  the  expenses  are  reduced  $100.   The  reverse  proposition  is 
also  true.   If  an  additional  typewriter  is  purchased  and  charged  to  expense 
instead  of  fixtures,  the  profits  are  understated  $100,  because  the  assets  are 
$100  less  than  they  should  be  and  the  expenses  are  $100  greater  than  they 
should  be.   In  order  to  ascertain  the  TRUE  profit  for  any  period,  the  classi- 
fication of  expenditures  as  between  capital  and  revenue  must  be  correct. 

Answer  to  Question  37 — When  a  single  merchandise  account  is  kept,  return 
sales,  being  charged  to  it,  are  mixed  with  the  purchases;  and  return  pur- 
chases, being  credited  to  it,  are  mixed  with  the  sales.   If  these  items  are 
numerous,  it  is  quite  difficult  to  determine  the  NET  PURCHASES  and  NET  SALES 
for  a  period.   This  is  due  to  the  fact  that  the  purchases  are  debited  at  cost 
and  return  sales  debited  at  selling  price.   Conversely,  sales  are  credited  at 
selling  price,  and  return  purchases  are  credited  at  cost.   Therefore,  separate 
accounts  should  be  opened  for  purchases,  to  which  would  be  credited  all  re- 
turns; and  another  should  be  opened  for  sales,  to  which  would  be  charged  all 
returns.   In  fact,  separate  accounts  are  usually  kept  for  return  purchases, 
return  sales,  and  allowances  on  sales  so  that  every  element  connected  with 
sales  and  purchases  will  be  properly  classified. 

Answer  to  Question  38 — A  petty  cash  fund  is  a  certain  amount  of  cash  set 
aside  to  pay  small  expense  items.   This  is  done  in  order  that  all  the  entries 
on  the  cash  book  may  be  represented  by  a  check,  and  all  receipts  may  be  daily 
deposited  intact  in  the  bank.   When  the  fund  is  nearly  depleted,  a  check  for 
the  amount  disbursed  is  given  to  the  petty  cashier  on  surrender  of  all  vouch- 
ers supporting  such  disbursements.   Thus,  the  petty  cashier  should  at  any  time 
have  on  hand  either  cash  or  vouchers  for  the  full  amount  of  the  fund. 

The  best  method  of  showing  same  on  the  books  is  to  open  a  Petty  Cash  Fund 
account  in  the  ledger,  charging  thereto  $100  set  aside  for  this  purpose  and 
crediting  cash.  When  a  check  is  given  to  reimburse  the  fund,  the  proper  ex- 
pense accounts  are  charged  and  cash  credited  in  the  cash  book.   Thus  no  change 
need  be  made  in  the  ledger  account  unless  the  fund  is  increased  or  decreased. 


Copyright,  1917,  The  Ronald  Press  Company 


1-15-7 


Answer  to  Question  39 — 

JONES  AND  BROWN 
BALANCE  SHEET,  DECEMBER  31,  1917 


ASSETS 
CAPITAL  ASSETS: 
Real  Estate 
Plant  and  Equipment 


Total  Capital  Assets 
J 


CAPITAL  AND  LIABILITIES 
CAPITAL: 

Jones        $ 

Brown '• . 


CURRENT  ASSETS: 
Inventories 
Customers' 
Accounts 
Notes  Re- 
ceivable 
Cash  in  Bank 
and  on  Hand 


Total  Capital 

CURRENT  LIABILITIES: 
Notes  Pay.    $ 


Accounts  Pay. 


Total  Current  Assets 
Total  All  Assets 


Total  Current  Lia- 
bilities 


Total  Capital  & 
Liabilities 


An  alternative  method  is  to  show  the  assets  in  the  order  of  their  liquid- 
ity, and  the  liabilities  in  the  order  in  which  they  will  be  met. 

JONES  AND  BROWN 
BALANCE  SHEET,  DECEMBER  31,  1917 


ASSETS 


CURRENT  ASSETS: 

Cash  in  Bank 
and  on  Hand 

Notes  Re- 
ceivable 

Customers* 
Accounts 

Inventory 


CAPITAL  AND  LIABILITIES 
CURRENT  LIABILITIES: 
Accounts 

Payable    ^ 

Notes  Pay- 
able        


Total  Current  Lia- 
bilities 


Total  Current  Assets 


CAPITAL  ASSETS: 
Real  Estate    $• 
Plant  &  Equip- 
ment 


CAPITAL: 
Jones 
Brown 


Total  Capital  Assets 


Total  All  Assets 


Total  Capital 
Total  Capital  & 
Liabilities 


Copyright,  1917,  The  Ronald  Press  Company 


1-15-8 

Answer  to  Question  40 — A  trade  discount  is  a  deduction  from  the  list  price 
of  an  article  and  is  usually  deducted  from  the  face  of  the  invoice  and  the  NET 
selling  price  charged  to  the  customer.  No  record  is  ordinarily  kept  of  trade 
discounts. 

In  some  businesses  fluctuations  in  market  prices  are  adjusted  through  the 
amount  of  trade  discount  allowed.   This  is  done  by  establishing  a  list  price 
(often  the  price  at  which  the  article  is  retailed)  which  is  higher  than  any 
possible  market  price.  Any  increase  or  decrease  of  the  net  price  at  which  it 
is  to  be  sold  is  made  by  an  adjustment  of  the  trade  discount  allowed.   This 
method  allows  of  discrimination  between  customers  by  giving  some  an  additional 
per  cent  without  others  being  aware  of  it.   It  saves  reprinting  of  catalogues, 
as  price  changes  can  be  made  through  a  circular  stating  the  change  in  the  dis- 
counts allowed. 

In  calculating  trade  discounts,  each  additional  per  cent  is  calculated  on 
the  net  amount  left  after  previous  discounts  are  deducted.   If  the  list  price 
is  $100  with  10,  40,  7,  and  5  off,  10%  is  deducted  from  $100,  then  40%  is  de- 
ducted from  $100  less  $10  or  $90,  making  this  discount  $36,  not  $40.   The 
others  are  treated  similarly,  so  that  the  net  selling  price  is  $47.71. 

The  cash  discount  is  a  premium  for  the  prompt  payment  of  a  debt  and  is  al- 
lowed at  the  time  of  payment.   Cash  discounts  are  shown  on  the  books.  Dis- 
count on  sales  and  discount  on  purchases  are  usually  kept  separate.   There  are 
several  methods  of  entering  cash  discounts  in  the  original  books  of  entry: 

1.  The  net  amount  of  cash  received  or  paid  is  entered  in  the  cash  book  and 
the  discount  charged  or  credited,  as  the  case  may  be,  through  the  journal. 
Where  the  discounts  are  numerous,  it  necessitates  a  large  amount  of  clerical 
work  in  making  the  entries  and  posting  them  to  the  ledgers. 

2.  The  total  amount  which  should  have  been  received  or  paid  is  entered  in 
the  cash  book  and  the  discount  treated  as  a  receipt  in  case  of  creditors  and  a 
disbursement  in  case  of  customers.   The  objection  to  this  is  that  two  entries 
are  made,  and  two  postings  are  required  the  same  as  in  No.  1. 

3.  A  columnar  cash  book  is  used  and  the  actual  cash  received  or  paid  is 
entered  in  the  first  column,  and  the  discount  entered  in  the  next  column.   Un- 
der this  method,  discount  on  sales  is  on  the  receipt  side  of  the  cash  book  and 
discount  on  purchases  on  the  disbursement  side.   This  is  done  to  avoid  rewrit- 
ing of  the  names  of  creditors  and  customers.  Another  advantage  is  that  the 
cash  and  discount  may  easily  be  compared.   The  objection  is  that  two  postings 
are  required,  one  for  the  cash  item  and  the  second  for  the  discount. 

4.  Where  a  columnar  cash  book  is  used,  the  best  method  is  to  enter  the 
total  amount  which  should  have  been  received  in  one  column,  the  discount  al- 
lowed in  a  second  column,  and  the  net  cash  received  in  a  third  column.   The 
total  of  'the  cash  and  discount  columns  is  equal  to  the  total  of  the  first 
column.  A  similar  treatment  is  adopted  for  payments  to  creditors.   Its  advan- 
tages are: 

(a)  Only  one  posting  need  be  made  to  customers'  or  creditors'  ac- 

counts. 

(b)  The  discount  may  be  compared  with  the  total  sale  or  purchase  from 

which  it  was  deducted. 

Copyright,  1917,  The  Ronald  Press  Company 


1-15-9 
Answer  to  Question  41 — Interest  is  a  sum  paid  or  received  for  the  use  of 
money,  while  a  cash  discount  is  an  allowance  for  the  prompt  payment  of  a  debt 
within  a  certain  time.   Bank  discount  is  the  equivalent  of  interest,  being  the 
amount  charged  by  the  bank  for  the  loan  represented  by  the  note  discounted. 

Answer  to  Question  42-- 

Party  from  whom  received  Z 

To — Notes  Receivable  $ 

Protest  Fees  

Note  of  due  not  paid 

and  protested. 

Answer  to  Question  43 — The  work  of  posting  can  thus  be  divided  among  sev- 
eral ledger  clerks.   By  the  use  of  controlling  accounts  on  the  general  ledger 
the  accuracy  of  each  subsidiary  ledger  can  be  checked  individually.   These 
controlling  accounts  being  summaries  of  the  details  in  the  subsidiary  ledger, 
the  general  ledger  keeper  is  enabled  to  prepare  financial  statements  without 
waiting  to  obtain  trial  balances  of  the  subsidiary  ledgers. 

Answer  to  Question  44 — Open  an  account  in  the  sales  ledger  headed  "C.  0. 
D.  Sales"  and  give  one  line  to  each  sale.   As  the  sale  is  made,  enter  the 
name  of  the  purchaser  in  the  explanation  column.  When  the  money  is  received, 
credit  C.  0.  D.  Sales  from  the  cash  book,  entering  the  credit  on  the  same  line 
as  the  original  debit.   The  open  items  in  the  account  represent  the  balance 
therein, 

1917 

Jan.  1  John  Jones 

"   6  Alfred  Tonty        1   78.50    Jan.  9  Alfred  Tonty      C-3  $78.50 

■   9  Richard  Ford 

Answer  to  Question  45 — A  note  is  a  written  promise  by  one  party  (called  the 
maker)  to  another  (called  the  payee)  to  pay  a  certain  sum  of  money  on  demand 
or  at  a  certain  future  time.   The  parties  are  the  maker,  payee,  and  indorser. 

Answer  to  Question  46 — A  bill  of  exchange  is  a  written  order  by  one  party 
(called  the  maker  or  drawer)  on  another  party  (called  the  drawee)  to  pay  to  a 
third  party  (called  the  payee)  a  certain  sum  of  money  at  sight  or  at  some  fu- 
ture time.   The  parties  are  the  drawer,  drawee,  and  payee,  indorser,  and  ac- 
ceptor. 

Answer  to  Question  47 — 

(a)  A  note  is  a  PROMISE  by  one  party  to  pay  a  second  party. 

(b)  A  bill  of  exchange  is  an  ORDER  by  one  party,  directing  a  second 

party  to  pay  a  third  party  according  to  the  tenor  of  the  order, 

(c)  A  sight  draft  is  a  bill  of  exchange  which  is  payable  on  present- 

ment to  the  drawee  by  the  payee, 

(d)  A  time  draft  is  a  bill  of  exchange  which  is  payable  at  a  certain 

time  after  presentment  to  the  drawee  and  acceptance  by  him, 

(e)  A  bank  draft  is  a  sight  draft  drawn  by  one  bank  on  another  bank, 

(f)  A  check  is  a  bill  of  exchange  drawn  on  a  bank,  payable  on  demand. 

Copyright,  1917,  The  Ronald  Press  Company 


C.  0,  D,  SALES 

1917 

1 

125.00 

1 

78.50    Jan.  9 

3 

72.23 

Answer  to  Question  48 — 

(a) 

Creditor  $ 

To — Notes  Payable 
Our  note  No on  account. 

(b) 

Notes  Receivable  

To — Customer 
Note  No signed  by indorsed 

by 

(c) 

Customer  

To — Notes  Receivable  (face  of  the  note) 
Protest  Fees  (cash  paid  for  protest) 

Note  of  received  December  31, 

1917,  due  January  31,  1918. 

Answer  to  Question  49 — 

(a) 

Cash  

Interest  Paid  

To — Notes  Receivable  Discounted 
Note  of  John  Doe  received  July  8,  1917,  due 
September  8,  1917,  discounted  at  City 
National  Bank,  5%. 

(b) 

Cash  

Interest  Paid  

To — Notes  Payable 
Discounted  our  note  at  Q%   at  City  National 
Bank. 

Answer  to  Question  50 — 

(a) 

John  Doe  

To — Notes  Payable 
Accepted  draft  of  John  Doe  due  January  10, 
1918. 

(b) 
Notes  Receivable 

To — Richard  Roe 
Richard  Roe  accepted  our  draft  due  January  8, 
1918. 

(c) 

Cash 

To — Customer 
Drew  sight  draft. 

Copyright,  1917,  The  Ronald  Press  Company 


1-15-10 


1-15-11 
Answer  to  Question  51 — A  controlling  account  is  an  account  kept  in  the 
general  ledger,  consisting  of  a  summary  of  the  items  which  have  been  posted  in 
a  detail  ledger. 

CUSTOMERS  CONTROLLING  ACCOUNT 
Total  of  opening  balances  per  last  trial  balance   Return  sales  and  allowances 

Sales  Cash  Received 

Dishonored  notes,  checks,  etc.  ,   '         Notes 

Interest  Accounts  charged  off 

Other  journal  debits  Other  journal  credits 

Cash  debits  (if  any)  Total  of  closing  balances 

CREDITORS  CONTROLLING  ACCOUNT 
Cash  payments  Total  of  opening  balances 

Notes  per  last  trial  balance 

Returns  and  allowances  Purchases 

Other  journal  debits  Interest 

Total  of  closing  balances  Other  journal  credits 

Cash  credits  (if  any) 

Answer  to  Question  52— 

Articles  of  partnership  entered  into  this  1st  day  of  January,  1917,  by  and 
between  John  Doe,  party  of  the  first  part,  and  Richard  Roe,  party  of  the 
second  part,  witnesseth: 

1.  The  said  party  of  the  first  part  and  the  party  of  the  second  part  here- 
by agree  to  form  a  partnership  for  the  purpose  of  conducting  a  wholesale  dry 
goods  business  in  the  City  of  Chicago,  State  of  Illinois. 

2.  The  name  of  said  partnership  shall  be  Doe  and  Roe. 

3.  Said  partnership  shall  begin  on  the  first  day  of  January,  1917,  and 
continue  for  five  years  thereafter,  unless  sooner  terminated  by  death  of 
either  partner  or  by  mutual  agreement. 

4.  Each  party  shall  invest  the  sum  of  Twenty-Five  Thousand  Dollars  ($25,- 
000)  to  be  paid  in  in  cash  on  or  before  the  first  day  of  February,  1917.  In  case 
either  party  shall  fail  to  pay  same  in  full,  interest  shall  be  charged  on  any 
deficiency  at  the  rate  of  5%  per  annum,  or  the  partnership  may  be  terminated 
at  the  option  of  the  other  party  to  this  agreement. 

5.  Each  party  hereto  shall  be  entitled  to  draw  an  amount  not  to  exceed 
$200  per  month.   Interest  at  the  rate  of  6%  per  annum  shall  be  charged  on  any 
excess  withdrawals  made  with  the  consent  of  the  other  party.   In  case  with- 
drawals are  made  without  such  consent,  the  partnership  may  be  terminated  at 
the  option  of  the  other  party. 

6.  Profits  shall  be  divided  two-thirds  (2/3)  to  the  party  of  the  first 
part  and  one-third  (1/3)  to  the  party  of  the  second  part. 

7.  In  the  case  of  the  death  of  either  party  the  estate  of  the  said  de- 
ceased shall  be  entitled  to  such  as  his  capital  account  appears  in  the  balance 
sheet  at  the  close  of  the  last  fiscal  period,  together  with  interest  at  6%  per 
annum  thereon  until  the  date  of  his  death.   In  addition  thereto  he  shall  re- 
ceive as  good-will,  an  amount  equal  to  two  times  his  share  of  the  average 
profits  of  the  three  last  completed  years.   The  amount  due  said  deceased  shall 
be  payable  in  three  annual  instalments  and  be  evidenced  by  notes  issued  by  the 
surviving  partner. 

Copyright,  1917,  The  Ronald  Press  Company 


1-15-12 

8.  At  the  close  of  each  fiscal  year  the  accounts  of  this  partnership  shall 
be  audited  by  a  Certified  Public  Accountant,  and  the  balance  sheet  signed  by 
each  partner  after  due  inspection.   Such  auditor  shall  be  appointed  by  mutual 
consent.   In  case  no  agreement  can  be  reached,  the  party  of  the  first  part 
shall  appoint  the  auditor  the  first  year  and  the  party  of  the  second  part 
shall  appoint  the  auditor  the  second  year. 

9.  In  case  of  disagreement  as  to  any  of  the  provisions  of  this  agreement, 
same  shall  be  referred  to  a  board  of  arbitrators  to  consist  of  one  member  ap- 
pointed by  the  party  of  the  first  part,  one  member  by  the  party  of  the  second 
part,  and  a  third  to  be  chosen  by  the  two  members  already  appointed. 

10.  It  is  mutually  agreed  that  neither  party  will  indorse  any  note  or  be- 
come surety  for  any  person  without  the  written  consent  of  the  other  party. 

In  Witness  Whereof,  we  have  hereunto  set  our  hands  and  seals  in  duplicate 
this  first  day  of  January,  1917. 

Signed,  sealed,  and  delivered  in  the       (Seal) 

presence  of —                                  (Party  of  the  first  part) 
( Seal ) - 

(Party  of  the  second  part) 

Answer  to  Question  55 — Profits  or  losses  are  shared  equally  unless  some 
other  basis  is  specifically  provided  by  the  partnership  agreement. 

Answer  to  Question  54 — The  average  investment  of  each  partner  during  the 
period  under  consideration  should  be  determined,  and  the  profits  divided  in 
proportion  to  this  average  investment.   The  modus  operandi  may  be  illustrated 
as  follows: 

SMITH'S  CAPITAL  ACCOUNT 
1917 
January   1   Invested  $10,000.00  which  remained  3  months  $30,000.00 

April     1     "        2,000.00 


Balance  $12,000.00   "       "    3   "  36,000.00 

July      1   Invested    3,000.00 


Balance  $15,000.00   "       "    2   "  30,000.00 

September  1   Invested    4,000.00 


Balance  $19,000.00   "       n    1   n  19,000.00 

October   1  Drew        2,000.00 


Balance  $17,000.00   "       "    2   "  34,000.00 

December  1  Drew        3,000.00 


Balance  $14,000.00   "       «    i   »  14,000.00 


12   "  $163,000.00 


Smith  therefore  had  an  average  investment  of  $163,000 
for  one  month,  or  $13,583.33  for  the  year. 

Copyright,  1917,  The  Ronald  Press  Company 


1917  BROWN'S  CAPITAL  ACCOUNT 

January   1   Invested  $20,000.00  which  remained  6  months 
July      1  Drew        3,000.00 


Balance  $17,000.00 
September  1  Drew        4,000.00 


December   1 


Balance  $13,000.00 
Invested    3,000.00 


Balance  $16,000.00 


1 
12 


1-15-13 
$120,000.00 

34,000.00 

39,000.00 

16,000.00 
$209,000.00 


Brown  therefore  had  an  average  investment  of  $209,000 

for  one  month  or  $17,416.67  for  the  year. 
Smith's  average  investment  (as  above)      $163,000.00 
Brown's    "        "      (  "    "   )       209,000.00 


Total 


$372,000.00 


Therefore  Smith  is  entitled  to  163/372  and  Brown  to  209/372  of  the  $22,500 
profits,  or  $9,858.87  and  $12,641.13  respectively. 

The  following  method  of  ascertaining  the  average  investment  gives  the  same 
results: 

1917  SMITH'S  CAPITAL  ACCOUNT 

January   1   Invested  $10,000.00  for  12  months        $120,000.00 
April     1      ■      2,000.00  "   9    "  18,000.00 

July      1      "      3,000.00  "   6    "  18,000.00 

September  1      "      4,000.00  "   4    »  16,000.00 


Total  invested  for  one  month 
October   1  Drew  out  $2,000.00  for  3  months 
December  1      "     3,000.00  "1    * 

Total  drawn  out  for  one  month 

Average  investment  for  one  month 

1917  BROWN'S  CAPITAL  ACCOUNT 

January   1   Invested  $20,000.00  for  12  months 
December  1     ■      3,000.00  "   1    * 

Total  invested  for  one  month 
July      1  Drew  out  $3,000.00  for  6  months 
September  1     "     4,000.00  "4    " 

Total  drawn  out  for  one  month 

Average  investment  for  one  month 


$  6,000.00 
3,000.00 


$240,000.00 
3,000.00 


$  18,000.00 
16,000.00 


$172,000.00 


9,000.00 


$163,000.00 


$243,000.00 


34,000.00 
$209,000.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-15-14 
Answer  to  Question  55 — In  a  sale,  the  title  to  the  goods  passes  to  the 
purchaser  at  the  time  of  sale.   In  a  consignment,  title  remains  in  the  con- 
signor until  the  goods  are  sold  by  the  consignee,  even  though  the  goods  are 
temporarily  in  the  possession  of  the  consignee.   Where  a  sale  is  made  the 
seller  has  a  civil  claim  for  the  purchase  price.   He  must  wait  until  the  claim 
is  due  according  to  the  terms  of  the  sale  before  any  collection  can  be  made. 
If  the  purchaser  should  become  bankrupt  in  the  meantime,  he  will  receive  such 
proportion  of  the  assets  as  the  total  of  his  claim  bears  to  the  total  of  all 
unsecured  claims.   Where  goods  are  consigned,  they  are  still  the  property  of 
the  consignor.   He  is  entitled  to  the  value  thereof  immediately  when  they  are 
sold  and  can  recall  the  goods  when  he  pleases  or  transfer  them  to  another  con- 
signee.  If  the  consignee  should  become  bankrupt,  he  is  entitled  to  the  actual 
goods  and  does  not  have  to  share  the  value  thereof  with  other  creditors.   If 
the  consignee  does  not  remit  when  the  goods  are  disposed  of,  the  consignee  is 
criminally  liable  for  conversion.  Where  goods  are  sold,  the  seller  must  as- 
certain the  purchaser's  ability  to  pay;  where  the  goods  are  consigned,  the 
consignor  is  concerned  only  with  the  honesty  of  the  consignee. 

On  the  other  hand,  the  consignor  may  be  willing  to  sell  but  the  consignee 
may  not  be  willing  to  buy,  because  he  doubts  his  ability  to  pay  for  same  when 
due,  or  that  the  goods  are  salable,  although  he  is  willing  to  give  them  a 
trial.  If  he  purchases  outright,  he  must  pay  whether  the  goods  have  been  sold 
or  not.   If  he  receives  them  on  consignment,  he  pays  when  the  goods  are  dis- 
posed of  and  the  consignor  takes  the  risk  of  their  salability. 

Answer  to  Question  56 — Capital  assets  are  those  of  a  permanent  nature, 
with  which  the  business  is  being  conducted,  such  as  real  estate,  machinery, 
etc.   Current  assets  are  those  in  which  the  business  is  dealing,  or  the  result 
of  the  conversion  of  such  assets.  Examples  are  inventories,  accounts  receiv- 
able, cash,  etc.   Floating  assets  are  the  same  as  current  assets.  Fixed  as- 
sets are  the  same  as  capital  assets.  Liquid  assets  are  those  which  can  easily 
be  converted  into  cash,  such  as  marketable  stocks  and  bonds,  notes,  accounts, 
etc.   Sometimes  the  inventory  is  a  liquid  asset.  Liquid  assets  are  often 
called  quick  assets. 

Capital  liabilities  are  the  more  or  less  permanent  contributions  to  the 
operation  of  a  business;  such  as  partners'  investment,  or  stock  issued,  or 
long-time  mortgage  obligations.   Current  liabilities  are  those  which  must  be 
met  within  a  short  period  of  time,  such  as  notes  payable,  accounts  payable, 
etc.  Fixed  liabilities  are  the  same  as  capital  liabilities.  Floating  lia- 
bilities are  the  same  as  current  liabilities. 

Answer  to  Question  57 — Inventories  should  be  valued  at  "cost  or  market, 
whichever  is  the  lower."  The  reason  for  this  is  that  no  profits  can  be  an- 
ticipated, but  all  losses  must  be  provided  for.   If  purchases  have  been  made 
on  a  falling  market,  it  is  not  conservative  to  place  a  higher  value  on  an  in- 
ventory item  than  the  price  at  which  the  same  thing  can  be  duplicated  in  the 
open  market.   It  may  seem  inconsistent  to  advocate  a  somewhat  different  prin- 
ciple when  purchases  have  been  made  on  a  rising  market  and  where  goods  cannot 
be  duplicated,  except  at  a  higher  price.   In  this  case,  however,  the  conserva- 
tive course  is  to  carry  the  items  at  cost  and  thus  do  away  with  the  objection- 
able practice  of  anticipating  profit.  No  profit  is  earned  until  a  sale  is 
made  to  a  solvent  debtor.  Duty  and  freight  paid  may  be  added. 

Copyright,  1917,  The  Ronald  Press  Company 


1-15-15 
"A  practice  which  deserves  condemnation  is  that  of  pricing  finished  goods 
at  sales  prices,  less  an  estimated  cost  of  delivery.   This  anticipates  the  en- 
tire profit  on  such  sales,  for  it  cannot  be  said  that  a  profit  is  ever  earned 
iintil  delivery  has  been  made  and  a  cause  of  action  established  against  a  sol- 
vent debtor.   The  fact  that  goods  may  be  made  up  on  the  order  of  a  responsi- 
ble purchaser  in  no  way  alters  the  principle.  Until  delivery  has  been  made 
and  the  goods  accepted,  the  sales  contract  is  not  complete.   It  is  not  uncom- 
mon for  orders  to  be  cancelled  or  goods  refused  for  so  many  reasons  that  they 
cannot  be  enumerated  here.   Therefore,  no  conservative  manufacturer  or  other 
business  man  considers  that  any  profit  is  earned  on  undelivered  goods."  (Mont- 
gomery— Auditing) 

Discussing  the  same  point,  A.  Lowes  Dickinson  says:  "Perhaps  one  of  the 
most  difficult  questions  which  accountants  have  to  decide  is  the  correct 
enumeration  and  valuation  of  stocks  on  hand.   The  theory  governing  the  valua- 
tion of  this  asset  is  that,  inasmuch  as  no  profits  can  be  realized  until  the 
goods  are  actually  sold,  it  is  not  safe  to  take  credit  for  any  profit  thereon 
until  a  sale  has  been  effected;  that  therefore  it  should  be  carried  forward  at 
the  exact  cost  and  no  profit  thereon  brought  into  the  accounts  of  the  fiscal 
period.   On  the  other  hand,  it  may  be  found  that  the  prices  both  of  the  raw 
materials  and  the  finished  product  have  at  the  close  of  the  fiscal  period 
fallen  below  their  cost,  and  while  it  is  impossible  to  say  until  the  goods 
have  been  sold  whether  any  loss  will  ultimately  be  sustained  thereon,  at  any 
rate  there  is  a  possibility  thereof.   It  is  therefore  conservative  to  set 
aside  a  sufficient  reserve  out  of  profits  which  have  been  realized  on  goods 
already  sold  to  provide  for  the  accruing  loss  on  those  which  remain  on  hand. 
Hence  the  general  rule  for  valuation  of  stocks  on  hand,  namely,  'cost  or  mar- 
ket, whichever  is  the  lower,*  has  been  evolved  and  is  adopted  by  the  most  con- 
servative commercial  institutions." 


Copyright,  1917,  The  Ronald  Press  Company 


1-15-16 
Solution  to  Assignment  1-14-5  Exhibit  A 

MILLER  BROS. 
BALANCE  SHEET,  APRIL  30,  19— 

ASSETS 
CAPITAL  ASSETS: 

Delivery  Equipment  $  1,750.00 

Warehouse  and  Office  Fixtures  1,450.00  $  3,200.00 

CURRENT  ASSETS: 

Inventory  of  Merchandise 
Consignments 

Miscellaneous  Supplies 

Advances  on  Consignments-Inward 

Customers*  Accounts 

Notes  Receivable 

Less — Notes  Receivable  Discounted 

Cash 

Petty  Cash  Fund 

PREPAID  EXPENSES: 

Unexpired  Insurance 
Rent  Paid  in  Advance 


$35,890.00 
3,200.00 

$39,090.00 

300.00 

1,100.00 

35,542.00 

100.00 

3,776.84 

$10,100.00 
10,000.00 

$  3,676.84 
100.00 

79,908.84 

$    50.00 
200.00 

250.00 

$83,358.84 

LIABILITIES  AND  CAPITAL 
CAPITAL  ACCOUNTS: 
Fred  Miller: 

Balance,  March  1,  19 —  $15,000.00 

Profit  for  March  and  April  2,835.23 


$17,835.23 
Less — Withdrawals  210.00  $17,625.23 


August  Miller: 

Balance,  March  1,  19 —  $15,000.00 

Profit  for  March  and  April  1,417.61   16,417.61 


CURRENT  LIABILITIES: 

Accounts  Payable  $36,080.00 

Notes  Payable  10,000.00 

Bank  Loan  3,000.00 

Taxes  Accrued  200.00 

Interest  Accrued  on  Notes  Payable  36.00   49,316.00 


$83,358.84 


Copyright,  1917,  The  Ronald  Press  Company 


1-15-17 

Exhibit  B 


MILLER  BROS. 

STATEMENT  OF  PROFIT  AND  LOSS 

TWO  MONTHS  ENDING  APRIL  30,  19— 

ACCESSORIES 


GROSS  SALES 


LESS — Return  Sales 

Allowances  on  Sales 
Freight-Out 

Total  Deductions  from  Sales 

NET  SALES 

Cost  of  Sales  (Exhibit  C) 

GROSS  PROFITS  FROM  SALES 

ADD— GROSS  PROFITS  ON  CONSIGNMENTS: 
Consignments-Outward 
Consignments-Inward 

GROSS  PROFITS  FROM  OPERATION 
SELLING  AND  ADMINISTRATIVE  EXPENSES: 

Salesmen's  Salaries  and  Commissions 

Salesmen's  Traveling  Expenses 

Miscellaneous  Selling  Expenses 

Delivery  Expenses 

Advertising 

Insurance  Expense 

Office  Salaries  and  Expenses 

General  Expenses 

Rent 

Taxes 

NET  PROFITS  FROM  OPERATION 
MISCELLANEOUS  INCOME: 
Interest  Received 
Discounts  on  Purchases 


LESS — Interest  paid 

Discounts  on  Sales 

SURPLUS  NET  PROFITS  (carried  to  Exhibit  A) 
To  be  divided  as  follows: 
Fred  Miller  2/3 
August  Miller  1/3 


AUTOS 
$42,312.00 

AND  SUPPLIES 
$60,165.00 

TOGETHER 
$102,477.00 

$  2,000.00 

200.00 

85.00 

$ 

1,710.00 

10.00 

100.00 

$ 

3,710.00 
210.00 
1^5.00 

$  2,285.00 

$ 

1,820.00 

$ 

4,105.00 

$40,027.00 
26,300.00 

$58,345.00 
49,330.00 

$ 

98,372.00 
75,630.00 

$13,727.00 

$ 

9,015.00 

$ 

22,742.00 

$ 

3,200.00 
2,820.00 

6,020.00 

$10,840.00 
300.00 

1,544.00 
878.00 

5,150.00 
10.00 

5,495.00 
162.00 
200.00 
200.00 

$ 

28,762.00 
24,779.00 

$ 

87.34 
864.50 

$ 

3,983.00 
951.84 

$ 

178.00 
504.00 

$ 

4,934.84 
682.00 

Lhibit  A) 

$ 

2,835.23 
1,417.61 

$ 

4,252.84 

$ 

4,252.84 

Copyright,  1917,  The  Ronald  Press  Company 


1-15-18 
Exhibit  C 
MILLER  BROS. 
STATEMENT  SHOWING  COST  OF  SALES 
TWO  MONTHS  ENDING  APRIL  30,  19— 

ACCESSORIES 

AUTOS    AND  SUPPLIES  TOGETHER 

PURCHASES                                $47,800.00  $55,570.00  $103,370.00 

Freight-In                                 500.00      360.00  860.00 


$48,300.00  $55,930.00  $104,230.00 
LESS — Return  Purchases  3,600.00     3,600.00 


NET  PURCHASES  $48,300.00  $52,330.00  $100,630.00 

LESS — Increase  in  Inventories  22,000.00    3,000.00    25,000.00 


COST  OF  SALES  (carried  to  Exhibit  B)  $26,300.00  $49,330.00  $  75,630.00 


Copirright,  1917,  The  Ronald  Press  Company 


I-16-L 


COMPLETE  ACCOUNTING  COURSE— PART  I 


Lecture  16 


CORPORATIONS;  VENDOR'S  PROCEDURE  UPON  SALE  OF  SINGLE  PROPRIETORSHIP  OR  PART- 
NERSHIP TO  CORPORATION 


Problem  13 

The  following  is  the  balance  sheet  of  Smith  &  Williams  at  December  31, 
1917: 


SMITH  &  WILLIAMS 
BALANCE  SHEET,  DECEMBER  31,  1917 


ASSETS 


CAPITAL  ASSETS: 
Real  Estate 
Furniture  & 
Fixtures 


J6,000.00 
1,790.00 


CAPITAL  AND  LIABILITIES 
CAPITAL: 

Fred  Smith    $20,000.00 
Amos  Williams   15,000.00 


Total  Capital  Assets   $  7,790.00 

CURRENT  ASSETS: 

Merchandise       $6,713.00 

Accounts  Re- 
ceivable       8,552.00 

Notes  Receivable   9,009.00 

Cash  in 

Bank  $6,790.24 

Cash  on 

Hand      43.76  6,834.00 


Total  Capital 

CURRENT  LIABILITIES: 
"Notes  Payable  $  2, 000. CO 
V  Accounts  Pay- 
able        1,898.00 


$35,000.00 


Total  Current  Liabili- 
ties 


3,898.00 


Total  Current  Assets 


Total  All  Assets 


31,108.00 


$38,898.00  >^ 


Total  Capital  and  Lia- 
bilities $38,898.00  v: 


The  Grocers'  Company  was  organized  under  the  laws  of  the  state  of  Maine 
with  an  authorized  capital  stock  of  $75,000  divided  into  750  shares,  par  value 
$100  each.   Smith  and  Williams  transfer  their  net  assets  and  good-will  in  ex- 
change for  $50,000  payable  in  stock. 

Prepare  the  entries  necessary  to  wind  up  the  books  of  the  partnership. 


Copyright,  1917,  The  Ronald  Press  Company 


1-16-2 

MISCELLANEOUS  QUESTIONS 
Question  58 — Outline  the  essential  differences  between  a  partnership  and  a 
corporation. 

Question  59 — If,  in  Problem  13,  the  Grocers'  Company  paid  $30,000  in  stock 
for  the  net  assets  of  Smith  &  Williams,  what  disposition  would  you  make  on  the 
books  of  the  firm  of  the  difference  between  book  value  and  purchase  price? 

Question  60 — What  are  some  of  the  reasons  why  a  corporation  might  wish  to 
pay  less  (measured  in  terms  of  par  value  of  capital  stock  given  in  exchange) 
than  the  book  value  of  the  net  assets  taken  over  from  a  firm? 

Question  61 — What  is  your  understanding  of  the  terms  "vendor"  and  "ven- 
dee"? Illustrate  their  use. 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

The  business  having  proven  profitable.  Miller  Bros,  decide  to  expand  their 
selling  organization  and  to  engage  also  in  the  manufacture  of  motor  cars.   To 
secure  the  necessary  capital  they  organize  a  corporation  in  conjunction  with 
P.  J.  Kirkwood.  At  a  meeting  of  the  organizers  Mr.  Kirkwood,  who  was  in 
charge  of  the  legal  work,  reports  as  follows: 

The  Miller  Motor  Car  Co.  is  to  be  incorporated  under  the  laws  of  the  state 
of  New  Jersey,  with  an  authorized  capital  stock  of  $200,000,  divided  into  7% 
preferred  stock  $100,000  and  common  stock  $100,000. 

He  also  reports  that  he  has  secured  the  following  subscriptions: 

7%  PREFERRED  STOCK  COMMON  STOCK 


Trad  Miller 

250 

shares 

Fred  Miller 

366 

shares 

August  Miller 

250 

n 

August  Miller 

134 

n 

P.  J.  Kirkwood 

150 

n 

P.  J.  Kirkwood 

100 

n 

B.  F.  Goodrich  Co. 

120 

• 

S.  K.  Stevenson 

100 

N 

A.  J.  Smallton 

130 

n 

Fred  Higgins 

150 

N 

S.  K.  Stevenson 

100 

R 
N 

Frank  Holloway 

150 

II 

1,000 

1,000 

Fred  Miller  submitted  a  proposition  from  Miller  Bros,  offering  to  transfer 
by  bill  of  sale,  the  net  assets  and  good-will  (which  is  valued  at  $66,000)  of 
Miller  Bros,  in  consideration  of  $100,000  to  be  paid  in  the  stock  of  the 
Miller  Motor  Car  Co.,  as  follows: 

7%  Preferred  Stock  500  shares 

Common  Stock  500    " 

In  event  the  adjusted  balance  sheet  of  Miller  Bros,  shall  show  net  assets 
in  excess  of  or  below  the  said  $100,000,  such  excess  or  deficit  shall  be  ad- 
justed by  a  payment  of  cash  to  or  by  the  company,  as  the  case  may  be. 

The  proposition  was  accepted,  the  transfer  effected,  and  stock  certifi- 
cates issued, 

Fred  Miller  instructs  you  to  make  the  entries  required  to  transfer  the  net 
assets  to  the  Miller  Motor  Car  Co.  in  accordance  with  the  foregoing  agreement. 
Preliminary  thereto  it  will  be  necessary  to  set  up  on  the  books  of  Miller 
Bros,  the  asset  of  good-will. 

Copyright,  1917,  The  Ronald  Press  Company 


1-16-3 

CORPORATIONS 

DEFINITION — A  corporation  is  an  artificial  person  created  by  law  for  cer- 
tain purposes  which  are  stated  in  its  charter.  It  is  an  organization  of  per- 
sons specially  authorized  by  law  to  act  as  one  person.   It  must  be  borne  in 
mind  that  it  is  an  artificial  entity,  separate  and  distinct  from  smy  of  its 
stockholders.             " 

DISTINGUISHED  FROM  A  PARTNERSHIP — A  partnership  is  a  contract  relation  be- 
tween two  or  more  individuals.   The  law  recognizes  only  the  individuals,  and 
the  relation  binds  only  the  partners  themselves.   A  corporation,  as  such,  is 
distinct  from  its  stockholders ;  the  law  recognizes  the  corporation,  not  the 
stockholders.   This  distinction  is  illustrated  in  the  case  of  title  to  real 
estate.  A  partnership,  as  such,  cannot  buy  or  sell  real  estate,  for  the  law 
does  not  recognize  it.   One  of  the  partners  must  buy  or  sell  it  on  behalf  of 
the  firm.   In  the  case  of  a  corporation,  all  of  its  stockholders  together 
could  not  buy  or  sell  its  real  estate,  for  the  law  does  not  recognize  them. 
The  corporation,  as  a  corporation,  must  buy  or  sell. 

KINDS — Corporations  are  divided  into  two  broad  classes:  public  and.   pri- 
vate.  The  former  is  composed  of  municipal  corporations  (cities  and  villages) 
and  quasi-municipal  corporations  (counties  and  subdivisions  of  the  state). 
Private  corporations  consist  of  stock  and  non-stock  corporations,  the  former 
made  up  of  all  corporations  organized  for  profit  (including  public  utilities 
or  "quasi-public"  corporations),  the  latter  of  clubs,  fraternal  organizations, 
mutual  societies,  charitable  institutions,  etc. 

FORMATION — In  the  United  States  corporations  must  be  organized  under  the 
laws  of  a  state,  territory,  or  the  federal  government.   These  laws  differ  ma- 
terially in  some  instances  and  offer  various  advantages  and  disadvantages  to 
businesses  incorporated  under  them.   Corporations  carrying  on  their  main  op- 
erations in  one  state  may  be  incorporated,  because  of  more  favorable  laws,  in 
another. 

The  "charter"  of  a  corporation  consists  of  a  document  filed  by  the  promot- 
ers of  the  corporation  (called  commissioners)  with  the  secretary  of  state  or 
other  designated  officer,  setting  out  certain  points  required  by  law  which 
usually  are: 

1.  Name 

2.  Object 

3.  Kinds  of  stocks,  amounts  and  numbers  of  shares 

4.  Place  of  business 

5.  Life  of  corporation 

6.  Names  of  incorporators  (commissioners) 

The  charter  having  been  approved  by  the  secretary  of  state  a  "certificate  of 
complete  organization"  is  issued  to  the  commissioners. 


Copyright,  1917,  The  Ronald  Press  Company 


1-16-4 
ADVANTAGES  OF  INCORPORATION — The  chief  advantages  of  incorporation  are: 

ABILITY  TO  SECURE  GREATER  CAPITAL — Many  enterprises  will  not  be  floated  by 
a  single  individual  because  he  may  be  unwilling  to  risk  his  entire  property 
under  a  partnership  organization  or  in  a  joint-stock  company.   Corporate  or- 
ganization offers  £in  attractive  investment  both  for  the  small  capitalist  and 
for  the  larger  capitalist.   The  former  can  invest  small  amounts  while  the 
latter  can  divide  the  risk  of  his  investments  over  a  wider  field  without  the 
attendant  problems  of  management. 

PERMANENCE.   A  partnership  is  automatically  dissolved  by  the  death  or  re- 
tirement of  one  of  the  partners  unless  otherwise  provided  in  the  partnership 
agreement.   A  corporation  exists  for  the  term  stated  in  the  charter  unless 
sooner  dissolved  by  vote  of  the  stockholders.   It  is  independent  of  the  death 
of  any  of  its  owners,  or  any  change  in  the  list  of  stockholders. 

IMPROVED  ORGANIZATION.   The  authority  to  be  exercised  by  the  various  offi- 
cers and  board  of  directors  is  much  more  clearly  defined  in  the  corporate  or- 
ganization than  in  the  partnership.   Business  may  be  done  only  with  duly 
qualified  officers  ;  no  stockholder,  as  such,  has  power  to  transact  business 
with  outsiders. 

TRANSFERABILITY.   A  partner  cannot  dispose  of  his  interest  without  the 
consent  of  the  other  partners  nor  can  he  pledge  his  interest  as  security.   The 
holder  of  corporation  shares  can  sell  them  whenever  and  to  whom  he  pleases 
and  can  also  pledge  them  as  security. 

LIMITED  LIABILITY.   The  liability  of  a  stockholder  (except  in  special 
cases)  is  limited  to  the  amount  of  his  original  investment  as  indicated  by  the 
par  value  of  the  shares  he  holds,  v;hile  that  of  a  partner  extends  to  his  en- 
tire private  fortune. 

DISADVANTAGES  OF  INCORPORATION — Some  of  the  disadvantages  of  incorporation 
are: 

LIMITED  CREDIT.   A  corporation  may  find  itself  embarrassed  after  its  or- 
ganization, in  that  creditors,  though  willing  to  extend  credit  to  the  old  firm 
with  its  unlimited  liability,  may  hesitate  to  extend  the  same  credit  to  the 
new  organization  with  its  liability  limited  to  the  investment  of  its  owners, 
and  in  many  cases  the  officers  as  individuals  are  required  by  creditors  to 
indorse  the  company  notes. 

RESTRICTED  POWERS.   The  charter  of  a  corporation  definitely  limits  its 
powers,  and  the  consent  of  the  state  must  be  obtained  for  any  change  therein. 
Thus,  in  Illinois,  a  corporation  cannot  deal  in  real  estate  nor  can  it  pur- 
chase shares  of  another  corporation.   The  present  tendency  is  to  form  corpora- 
tions with  broad  powers  and  the  importance  of  this  restriction  is  lessening, 

GOVERNMENTAL  SUPERVISION.   The  increasing  control  by  state  and  federal 
boards  over  private  corporations  is  a  factor  to  be  considered  in  some  cases. 
The  burdens  imposed  by  the  government  in  the  way  of  reports,  fees,  taxes,  and 
supervision  in  general  may  prove  burdensome. 

Copyright,  1917,  The  Ronald  Press  Company 


1-16-5 

STOCKHOLDERS — Stockholders  are  the  owners  of  the  corporation,  correspond- 
ing to  the  partners  in  a  partnership.   Their  relation  to  the  business  is  very 
different,  however,  from  that  of  partners  since  they  take  no  active  part  (ex- 
cept as  directors  or  officers)  in  its  operation.   Their  evidence  of  ownership 
is  the  "shares"  or  stock  of  the  corporation  which  may  be  transferred  at  the 
will  of  the  owner.   Stockholders  have  the  right,  at  common  law,  to  make  the 
by-laws  of  the  corporation,  and  to  elect  a  board  of  directors  who  are  respon- 
sible to  the  stockholders  for  the  manner  in  which  the  corporation  is  operated. 
The  by-laws  of  a  corporation  may  be  originated  or  changed  by  the  board  of 
directors  without  consent  of  the  stockholders  where  such  authority  is  granted 
to  the  board  by  the  laws  of  the  state,  or  by  the  charter  or  by  action  of  the 
stockholders. 

BOARD  OF  DIRECTORS — Directors  are  in  general  responsible  for  the  direction 
and  management  of  the  corporation's  affairs.   Their  powers  and  duties  are  out- 
lined by  the  by-laws.   Officers  are  appointed  by  them  and  the  directors  must 
pass  upon  all  transactions  of  the  business  outside  the  scope  of  authority  of 
the  officers. 

OFFICERS — The  number  of  officers,  their  titles  and  responsibilities  vary 
in  different  kinds  of  corporations.   Their  combined  duties  are  to  operate  the 
corporation  in  accordance  with  the  provisions  contained  in  the  charter  and  by- 
laws and  with  the  powers  delegated  to  them  by  the  board  of  directors. 

BY-LAWS — In  order  that  the  organization  may  be  well  defined  and  the  rela- 
tions, duties,  and  rights  of  officers  clearly  understood,  by-laws  are  enacted 
containing  a  definite  statement  of  these  matters.   The  following  points  are 
usually  covered: 

1.  When  and  where  annual  meeting  of  stockholders  will  be  held 

2.  Number  of  directors,  when  they  are  to  be  elected,  and  place  of 

their  meetings 

3.  Officers  and  their  duties 

4.  Salaries 

5.  Depositories 

6.  Provisions  governing  transfer  of  stock 

7.  Seal 

VENDOR'S  PROCEDURE  UPON  SALE  OF  SINGLE  PROPRIETORSHIP  OR 
PARTNERSHIP  TO  CORPORATION 

The  procedure  to  be  followed  in  case  the  net  assets  of  a  single  proprie- 
torship are  transferred  to  a  partnership  has  been  shown  in  1-8-3.   The  pro- 
cedure to  be  followed  in  case  the  sale  had  been  made  to  a  corporation  would 
clepend  somewhat  on  the  manner  in  which  the  transaction  was  effected.   General- 
ly, a  formal  bill  of  sale  is  prepared  which  specifies  the  assets  to  be  trans- 
ferred, the  liabilities  to  be  assurilSd,  the  valuations  upon  which  the  sale  is 
made,  and  the  manner  in  which  payment  is  to  be  made  by  the  vendor.   The  more 
common  cases  to  be  dealt  with  are: 

1.  Assets  transferred  at  a  different  valuation  from  that  appearing  on 

the  books  of  the  vendor. 

2.  Assets  trcinsferred  at  a  lump  sum  valuation  which  includes  good- 

will. 

Copyright,  1917,  The  Ronald  Press  Company 


1-16-6 
CASE  1 — The  assets  may  be  sold  at  a  greater  or  less  valuation  than  the 
book  figures.   The  first  step  is  to  adjust  the  book  figures  to  the  new  valua- 
tions, the  contra  debit  or  credit  being  made  to  Profit  and  Loss  account  inas- 
much as  this  is  a  realized  profit  or  loss.   The  assets  as  revalued  are  then 
transferred  to  the  vendee  and  entry  made  for  the  consideration  received. 

(1) 

Various  Assets  (in  detail)  $ 

To — Profit  and  Loss  $ 

To  adjust  the  book  figures  to  the  valuations 

set  out  in  bill  of  sale  dated  

(Note:  Losses  upon  various  assets  would  be 
credited  to  the  asset  accounts  and  charged 
to  Profit  and  Loss.) 

(2) 

Vendee  — 

To — Assets (in  detail) 

To  record  transfer  of  assets  to  

as  per  bill  of  sale  dated  


(3) 

Liabilities  (in  detail) 

To — Vendee  

To  record  assiimption  of  liabilities  by  Vendee. 

(4) 
Cash,  Stock,  or  Other  Consideration 

To — ^^Vendee  

To  record  receipt  of  payment  in  full  for  net 
assets  transferred, 

(5) 

Capital  Account  

To — Cash,  Stock,  or  Other  Consideration  

To  record  distribution  of  assets  on  hand. 

CASE  2 — Where  the  net  assets  are  sold  for  a  lump  sum  which  is  in  excess  of 
■the  book  valuation,  and  such  excess  cannot  be  attributed  to  any  one  or  more  of 
the  assets  disposed  of,  it  is  evident  that  an  intangible  asset,  which  may  be 
called  Good-will,  has  also  been  sold.   This  frequently  occurs  where  the  sale 
covers  not  merely  the  book  assets  but  also  the  business  as  a  going  concern. 
Assuming  the  net  assets  in  Case  1  were  $30,000,  and  that  the  Vendee  paid  |40,- 
000  for  the  business  as  a  going  concern,  the  first  entry  to  be  made  would  be: 

Good-will  $10,000.00 

.To — Profit  and  Loss  (or  direct  to  Capital 

Account)  $10,000.00 

To  take  up  good-will  realized  on  sale  of 
business  to  

JJntries  2,  3,  4,  and  5  would  then  be  made  as  in  Case  1, 

Copyright,  1917,  The  Ronald  Press  Company 


1-16-7 
If  the  vendor  does  not  deem  it  advisable  to  show  the  character  of  the  con- 
sideration received,  entries  (4)  and  (5)  may  be  combined,  thus: 


Capital  Account  $• 

To — Vendee 
To  close  Vendee's  account.   Payment  for  net 
assets  made  directly  to  

REFERENCES : 

Bentley,  "Science  of  Accounts,"  pages  31-36 

Oilman,  pages  284-294 

Greendlinger  and  Schulze,  pages,  230-251 


Copyright,  1917,  The  Ronald  Press  Company 


1-17-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  17 

CAPITAL  STOCK 


Problem  14  ' 

Referring  to  Problem  13,  prepare  the  necessary  journal  entries  to  open  the 
books  of  the  Grocers*  Company. 

MISCELLANEOUS  QUESTIONS 

Question  62 — James  Brown,  William  Harper,  and  Charles  Edwards  have  formed 
the  American  Motor  Truck  Co.,  with  an  authorized  capital  stock  of  $100,000. 
Brown  subscribes  for  500  shares.  Harper  and  Edwards  for  250  shares  each,  cash 
to  be  paid  in  full  on  allotment.   The  subscriptions  are  made  January  1,  1917, 
allotments  March  1,  1917. 

Prepare  the  necessary  entries  to  record  the  above  facts.  . 

Question  63 — Suppose  in  the  above  case  Brown,  Harper,  and  Edwards  had  each 
subscribed  for  250  shares,  the  balance  remaining  unissued.  What  entries  would 
you  make? 

Question  64 — Assume  in  the  case  cited  in  Question  63  that  instead  of  cash 
being  paid  in  full  on  allotment,  only  50%  of  the  par  value  is  to  be  paid  in 
cash  on  allotment,  balance  to  be  paid  when  called  for.  Wherein  would  the 
entries  differ? 

Question  65 — Assuming  the  facts  in  Question  62,  if  Brown,  Harper,  and 
Edwards  on  March  2,  1917,  donated  30  shares  each  to  the  corporation  for  the 
purpose  of  raising  working  capital,  what  entries  would  be  required,  the  do- 
nated stock  having  been  disposed  of  by  the  corporation  at  $90  per  share  on 
March  15,  1917? 

Question  66 — What  is  the  difference  between  "capital"  and  "capital  stock" 
of  a  corporation?  Explain  in  detail. 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

Referring  to  1-16-2,  prepare  the  opening  entries  to  be  made  on  the  books 
of  the  Millor  Motor  Car  Co. : 

(a)  To  record  the  subscriptions, 

(b)  To  record  the  assets  purchased. 

(c)  To  record  the  liabilities  assumed. 

(d)  To  record  the  payment  for  the  net  assets  purchased. 

Copyright,  1917,  The  Ronald  Press  Company 


Solution  to  Assignment  1-16-2 


ENTRIES  REQUIRED  ON  BOOKS  OF  MILLER  BROS. 

TO  RECORD  SALE  OF  NET  ASSETS  TO 

THE  MILLER  MOTOR  CAR  CO. 


1-17-2 


(1) 
Good-will 

To — Fred  Miller — Capital  Account 

August  Miller — Capital  Account 

To  set  up  value  of  good-will  on  sale  of  net 

assets  to  Miller  Motor  Car  Co. 


$  66,000.00 


44,000.00 
22,000.00 


(2) 
Miller  Motor  Car.  Co.,  Vendee  159,316.00 

To — Good-will  66,000.00 

Delivery  Equipment  1,750.00 

Warehouse  &  Office  Fixtures  1,450.00 

Inventories  of  Merchandise  35,890.00 

Miscellaneous  Supplies  300.00 

Customers  Ledger  35,542.00 

Notes  Receivable  10,100.00 

Advances  on  Consignments- Inward  1,100.00 

Consignment  Stock  Outward  3,200.00 

Cash  3,634.00 

Petty  Cash  Fund  100.00 

Unexpired  Insurance  50.00 

Rent  Paid  in  Advance  200.00 

To  record  the  transfer  of  assets  in  accord- 
ance with  bill  of  sale  dated  April  29, 
19—. 

(3) 
Creditors  Ledger  36,080.00 

Notes  Payable  10,000.00 

Notes  Receivable  Discounted  10,000.00 

Taxes  Accrued  200.00 

Interest  Accrued  on  Notes  Payable  36.00 

Bank  Loan  3,000.00 

To — Miller  Motor  Car  Co.,  Vendee  59,316.00 

To  record  the  liabilities  assumed  by  Miller 
Motor  Car  Co.,  per  bill  of  sale. 


(4) 

Miller  Motor  Car  Co. — Common  Stock 
Miller  Motor  Car  Co. — Preferred  Stock 
To — Miller  Motor  Car  Co. ,  Vendee 
To  record  receipt  of  payment  in  full  for 
net  assets  trgmsferred  per  bill  of  sale. 


50,000.00 
50,000.00 


100,000.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-17-3 


(5) 
Fred  Miller—Capital  Account  $61,625.23 

August  Miller — Capital  Account  38,417.61 

To — Miller  Motor  Car  Co.— Common  Stock  $50,000.00 

Miller  Motor  Car  Co. — Preferred  Stock  50,000.00 

Cash  42.84 

To  distribute  assets  on  hand  as  follows: 

FRED  MILLER  AUGUST  MILLER  TOGETHER 

7%  Preferred  Stock   $25,000.00    $25,000.00  $50,000.00 

Common  Stock         36,600.00     13,400.00  50,000.00 

Cash                   25.23         17.61  42.84 


$61,625.23    $38,417.61    $100,042.84 


Copyright,  1917,  The  Ronald  Press  Company 


1-17-4 
CAPITAL  STOCK 

DEFINITION  OF  CAPITAL  STOCK— "Capital  Stock"  signifies  the  sum  total  of 
certificates  of  ownership  of  a  corporation  expressed  in  number  of  shares  or  in 
the  aggregate  "par  value"  of  shares. 

VALUE — The  PAR  VALUE  of  a  share  of  stock  is  the  amount  appearing  on  its 
face  and  is  known  also  as  its  "nominal"  value.  Thus,  a  corporation  when  organ- 
ized is  authorized  to  issue  a  limited  number  of  shares  of  a  stated  par  value. 
In  certain  states  the  par  value  must  not  exceed  specified  limits  ;  in  Illinois 
the  par  value  must  not  be  less  than  $10  per  share  nor  greater  than  $100  per 
share.   In  a  few  states,  notably  New  York,  shares  may  be  issued  without  par 
value  under  certain  conditions.   The  BOOK  VALUE  of  capital  stock  is  the  net 
work  of  the  corporation  "per  books"  (Capital  Stock  and  Surplus).   MARKET 
VALUE  of  stock  is  the  price  which  it  will  yield  when  sold  on  the  market.   No 
two  of  these  three  values  need  be  alike. 

KINDS  OF  CAPITAL  STOCK — There  are  two  general  classes  of  capital  stock: 

1.  COMMON  STOCK.   Common  stock  is  the  ordinary  stock  of  a  corporation, 
having  no  special  privileges.  When  the  stock  of  a  corporation  is  all  of  one 
kind,  it  is  common  stock. 

2.  PREFERRED  STOCK.   Stock  issued  under  conditions  whereby  it  is  entitled 
to  special  privileges:  for  instance,  to  receive  a  specified  dividend  to  be 
paid  out  of  profits  before  any  dividend  can  be  paid  on  common  stock.   Pre- 
ferred stock  may  be  cumulative  or  non-cumulative,  voting  or  non-voting,  and, 
in  case  of  liquidation,  preferred  as  to  assets  over  common  stock  or  not  pre- 
ferred as  to  assets.   If  preferred  stock  is  cumulative,  the  specified  dividend 
for  each  year  during  which  the  stock  is  outstanding  must  be  paid  before  common 
stock  may  receive  a  dividend. 

Since  preferred  stocks  vary  greatly,  the  face  of  each  stock  certificate 
should  plainly  indicate  its  character.   In  case  this  information  is  absent,  or 
obscure,  it  has  been  held  that  "preferred  stock"  is  cumulative  as  to  profits 
but  not  preferred  as  to  assets  in  case  of  liquidation.   There  may  be  several 
classes  of  preferred  stock  in  the  same  corporation,  such  as  "First  Preferred," 
"Second  Preferred,"  etc. 

PAYMENT  FOR  CAPITAL  STOCK  ISSUED— Stock  may  be  paid  for  in  either  one  or 
all  of  three  ways:  (1)  by  cash;  (2)  by  property  transfers;  and  (3)  by  labor  or 
service. 

SUBSCRIPTIONS — Stock  subscriptions  are  enforceable  promises  in  writing  to 
pay  on  a  certain  agreed  date  or  dates  or  to  pay  upon  "call"  or  demand  an 
amount  usually  equaling  the  par  value  of  a  certain  number  of  shares.   Only 
after  a  certain  number  of  shares  have  been  subscribed  for  and  a  certain  amount 
paid  in  (in  cash,  property,  or  services)  can  the  corporation,  as  such,  com- 
mence business.   In  Illinois,  the  law  requires  that  the  entire  amount  of  capi- 
tal stock  authorized  must  be  fully  subscribed  for  and  at  least  one-half  paid 
in  before  the  commencement  of  operations. 

Allotment  takes  place  when  the  subscribers  to  capital  stock  are  determined 
upon.  Allotment  may  precede,  or  be  concomitant  with,  the  final  payment  of 
subscriptions. 

Copyright,  1917,  The  Ronald  Press  Company 


1-17-5 

Some  states  allow  the  forfeiture  of  subscriptions  past  due,  the  subscriber 
having  been  duly  notified.   In  most  states  the  law  holds  that  no  portion  of 
the  amount  already  paid  in  need  be  refunded  unless  a  subsequent  sale  of  the 
stock  representing  the  subscription  yields  a  sum  in  excess  of  the  amount  due 
from  the  delinquent  subscriber. 

ACCOUNTING  FOR  CAPITAL  STOCK 
1.  WHEN  ORIGINALLY  ISSUED  OR  SUBSEQUENTLY  TRANSFERRED— 

(a)  SUBSCRIPTION  BOOK.  The  subscription  book  is  a  book  of  original  or 
memorandum  entry  in  which  are  recorded  the  names  and  addresses  of  the  sub- 
scribers and  the  number  and  par  value  of  the  shares  subscribed  by  each.  A 
separate  subscription  book  is  kept  for  each  class  of  capital  stock. 

(b)  SUBSCRIPTION  OR  INSTALMENT  LEDGER.   An  account  is  kept  for  each  sub- 
scriber, showing  as  debits  the  amount  of  the  subscriptions  and  credits  for  the 
payments  when  made.   The  Subscriptions  account  in  the  general  ledger  will  con- 
trol this  subsidiary  ledger.   When  the  stock  is  paid  there  will  be  no  further 
use  for  this  ledger. 

(c)  STOCK  CERTIFICATE  BOOK.   The  stock  certificate  book  is  a  bound  record 
containing  perforated  sheets  one  or  more  of  which  are  filled  out  with  the  name 
of  the  stockholder  and  the  number  of  shares  the  certificate  represents.   The 
certificates  are  removed  at  the  time  of  issue  and  sent  to  the  stockholders 

as  evidence  of  their  proprietorship  in  the  corporation.   A  stub  for  each  cer- 
tificate remains  in  the  book ;  cancelled  certificates  are  pasted  to  the  corre- 
sponding stub.   The  stock  outstanding  will  be  represented,  therefore,  by  the 
"open"  stubs  in  the  stock  certificate  book. 

The  stock  certificate  book  is  kept  by  the  secretary.   Where  the  amount  of 
work  is  heavy,  a  "Transfer  Agent"  (usually  a  trust  company)  is  appointed. 

(d)  STOCK  LEDGER.  In  most  states  the  law  requires  that  the  capital  stock 
outstanding  shall  be  detailed  in  a  record  called  a  stock  ledger.  This  in  any 
case  is  necessary  where  the  subscribers  are  at  all  numerous.  The  stock 
ledger,  in  effect,  is  a  recapitulation  of  the  stock  certificate  book.  An  ac- 
count is  kept  with  each  stockholder.  This  account  is  credited  for  the  amount 
of  stock  (par  value)  issued  to  him  and  debited  for  any  transfers  shown  by  the 
transfer  book,  at  which  time  a  credit  is  made  to  the  transferee's  account. 
The  balance  of  each  account  shows  the  par  value  of  the  stockholder's  holdings 
and  forms  the  basis  for  computing  the  dividends  to  be  distributed. 

Separate  stock  ledgers  are  kept  for  each  class  of  stock.  Where  the  amount 
of  work  involved  is  large,  a  "Registrar"  (usually  a  trust  company)  is  ap- 
pointed. 

(e)  TRANSFER  BOOK.   The  transfer  of  shares  requires  merely  an  adjustment 
between  the  accounts  in  the  stock  ledger.   The  transfer  book  is  a  journal  con- 
taining the  original  entries  necessary  to  adjust  the  accounts  and  to  record 
the  following  information: 

(1)  Date  of  transfer 

(2)  Kind  of  stock  transferred 

(3)  Numbers  of  certificates  surrendered 

(4)  Numbers  of  certificates  issued  in  exchange 

(5)  Number  of  shares 

(6)  N£une  of  transferrer 

(7)  Name  of  transferee 

Copyright,  1917,  The  Ronald  Press  Company 


1-17-6 

2.  WHEN  ORIGINALLY  UNISSUED  OR  ISSUED  AND  SUBSEQUENTLY  ACQUIRED— It  is 
necessary  to  distinguish  carefully  the  terms  used  in  connection  with  the 
shares  of  the  corporation  which  have  been  reacquired  or  never  issued: 

(a)  TREASURY  STOCK.   Stock  which  has  been  fully  paid  for  and  has  been  re- 
acquired by  the  corporation,  through  purchase  or  gift,  is  known  as  TREASURY 
STOCK.   On  the  balance  sheet  it  appears  either  as  an  asset  (if  intended  to  be 
resold  within  a  short  period  of  time)  plainly  labeled  and  standing  between 
capital  and  current  assets,  or  deducted  (at  par)  from  the  capital  stock  au- 
thorized in  order  to  bring  out  the  amount  of  stock  "issued  and  outstanding." 
DONATED  STOCK  (treasury  stock  acquired  through  gift)  may  be  distinguished  by  a 
separate  caption,  if  desired. 

(b)  UNISSUED  STOCK.  Unissued  stock  refers  to  stock  authorized  but  as  yet 
unissued.   It  is  merely  a  ledger  account  which  allows  the  total  authorized 
issue  to  be  shown  on  the  general  ledger.   On  the  balance  sheet  it  must  be  de- 
ducted from  the  authorized  issue. 

(c)  UNSUBSCRIBED  STOCK.   Unsubscribed  stock  differs  from  unissued  stock  in 
that  the  latter  may  have  been  subscribed  for  but  for  some  reason  never  issued. 
The  two  terms,  however,  are  generally  synonymous.   On  the  balance  sheet  they 
should  be  deducted  from  the  authorized  capital  stock,  and  are  never  under  any 
circumstances  shown  as  an  asset. 

OPENING  THE  BOOKS  OF  A  CORPORATION 
The  entries  to  be  made  to  open  the  books  of  a  corporation  depend  upon: 

1.  The  facts  in  the  case, 

2.  Limiting  provisions  in  the  statutes  of  the  state  in  which  the  com- 

pany is  organized. 

CASE  1 — A  corporation  is  capitalized  at  $100,000,  all  stock  fully  sub- 
scribed for  and  the  subscriptions  paid  in  full  in  cash: 

(a) 
Subscriptions  $100,000.00 

To — Capital  Stock  $100,000.00 

To  record  the  authorized  issue  and  sub- 
scriptions therefor. 

(b) 
Cash  100,000.00 

To — Subscriptions  100,000.00 

To  record  receipt  of  payment  in  full. 

CASE  2 — A  corporation  is  capitalized  at  $100,000,  of  which  $50,000  has 
been  subscribed  for,  the  subscriber  paying  one-half  in  cash  and  one-half  in 
notes: 

(a) 
Subscriptions  $  50,000.00 

Unsubscribed  Stock  •  50,000.00 

To — Capital  Stock  $100,000.00 

To  record  authorized  capital  stock  and 
amount  subscribed  for. 

Copyright,  1917,  The  Ronald  Press  Company 


1-17-7 
(b) 

Cash  $25,000.00 

To—Subscriptions  125,000.00 

One-half  total  subscriptions  paid  in  cash. 

(c) 

Notes  Receivable  25,000.00 

To— Subscriptions  25,000.00 

One-half  total  subscriptions  paid  in  notes. 

CASE  3 — The  Lawndale  Manufacturing  Co.  is  organized  with  a  capital  stock 
of  $400,000,  divided  into  |20Q,000  1%   preferred  stock  and  $200,000  common 
stock,  par  value  $100  per  share.   The  company  buys  the  net  assets  of  Richards 
&  Harlem,  per  balance  sheet  given  below,  for  $400,000,  to  be  paid  for  in  200 
shares  of  preferred  stock  and  200  shares  of  common  stock: 

RICHARDS  &  HARLEM 
BALANCE  SHEET,  JANUARY  1,  1917 

Plant,  Machinery,  and  Tools  $200,000.00  Richards — Capital  Account  $100,000.00 
Inventories  50,000.00  Harlem — Capital  Account     125,000.00 

Other  Current  Assets        50,000.00  Accounts  Payable  75,000.00 


$300,000.00  $300,000.00 


ENTRIES  ON  THE  BOOKS  OF  THE  CORPORATION 

THE  LAWNDALE  MANUFACTURING  CO. 

Organized  under  the  laws  of 

THE  STATE  OF  MAINE 

With  an  Authorized  Capital  Stock  of 

$400,000.00 

divided  equally  into  7%  Preferred  Stock 

and  Common  Stock.  Par  value  of  Shares  $100.00  each 

(a) 

Unissued  7%  Preferred  Stock  $200,000.00 

Unissued  Common  Stock  200,000.00 

To — 1%   Preferred  Stock  Authorized  $200,000.00 

Common  Stock  Authorized  200,000.00 

To  record  the  authorized  capital. 

(1)) 

Plant,  Machinery,  and  Tools  200,000.00 

Good-will  175,000.00 

Inventories  50,000.00 

Other  Current  Assets  50,000.00 

To — Richards  k   Harlem,  Vendor  475,000.00 
To  record  the  purchase  of  the  assets  of 
Richards  &  Harlem,  per  bill  of  sale  dated 
January  1,  1917.  See  resolution  of  Di- 
rectors (minute  book,  page ). 

Copyright,  1917,  The  Ronald  Press  Company 


1-17-8 
(c) 
Richards  &  Harlem,  Vendor  $  75,000.00 

To — Accounts  Payable  $  75,000.00 

To  record  assumption  of  the  liabilities  of 
Richards  &  Harlem. 

(d) 
Richards  &  Harlem,  Vendor  400,000.00 

To — Unissued  7%  Preferred  Stock  200,000.00 

Unissued  Common  Stock  200,000.00 

To  record  payment  in  full  for  net  assets 
acquired. 

CASE  4 — In  Case  3  if  the  stock  had  all  been  subscribed  for  and  the  prop- 
erty received  in  payment  of  the  subscriptions,  entry  (a)  would  be: 

Subscriptions — 7%  Preferred  Stock  ^200,000.00 

Subscriptions — Common  Stock  200,000.00 

To — 7%  Preferred  Stock  $200,000.00 

Common  Stock  200,000.00 

To  record  authorized  capital  and  subscrip- 
tions thereto. 

and  entry  (d)  recording  the  payment  for  net  assets  acquired  would  be: 

Richards  &  Harlem,  Vendor  $400,000.00 

To — Subscriptions — 7%  Preferred  Stock  $200,000.00 

Subscriptions — Common  Stock  200,000.00 

To  record  payment  of  subscriptions  in  full. 
See  resolution  of  Board  of  Directors, 
minute  book,  page — . 

CASE  5 — If,  in  Case  3,  the  agreed  purchase  price  was  100  shares  of  pre- 
ferred stock  and  100  shares  of  common  stock,  the  entries  from  (b)  on  would  be: 

(b) 
Plant,  Machinery,  and  Tools  $200,000.00 

Inventories  50,000.00 

Other  Current  Assets  50,000.00 

To— Richards  &  Harlem,  Vendor  $300,000.00 

To  record  purchase,  etc. 

(c) 

Richard  &  Harlem,  Vendor  75,000.00^ 

To— Accounts  Payable  '   75,000.00 

To  record  assumption,  etc. 

(d) 
Richards  &  Harlem,  Vendor  $225,000.00 

To— Unissued  Preferred  Stock  100,000.00 

Unissued  Common  Stock  100,000.00 

Capital  Surplus  25,000.00 

To  record  settlement  in  full  for  net  assets  acquired. 

Copyright,  1917,  The  Ronald  Press  Company 


1-17-9 
CASE  6 — In  order  to  raise  working  capital,  the  stockholders  donate  200 
shares  of  the  7%  preferred  stock  to  be  sold  on  the  market  for  cash  and  these 
shares  are  subsequently  disposed  of  at  $80  per  share. 

Donated  (or  Treasury)  Stock  $20,000.00 

To — Capital  Surplus  $20,000.00 

200  shares  of  7%   preferred  stock  donated  to 
be  sold  for  cash  to  provide  working 
capital. 

Cash  16,000.00 

Capital  Surplus  4,000.00 

To — Donated  Stock  20,000.00 

200  shares  of  preferred  stock  donated  sold 
at  $80  per  share. 

The  Capital  Surplus  appearing  in  the  last  two  cases  represents  the  excess 
of  assets  over  liabilities  and  capital  stock.   It  is  obvious  that  a  business 
cannot  start  operations  on  the  purchase  of  its  assets,  nor  with  a  profit  made 
up  of  donations  from  its  stockholders.   On  the  balance  sheet  Capital  Surplus 
is  set  out  as  a  separate  item  between  capital  and  current  liabilities  or  fol- 
lowing current  liabilities.   Capital  Surplus  is  referred  to  later  in  a  discus- 
sion of  surplus. 

REFERENCES : 

Bennett,  Chapter  XIII 
Dickinson,  pages  127-133 
Esquerre,  Chapter  IV 
Oilman,  pages  303-323 
Hatfield,  Chapters  VIII-IX 
Klein,  pages  115-132,  138-145 
Montgomery,  pages  133-134,  137 


Copyright,  1917,  The  Ronald  Press  Company 


1-18-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  18 

BONDS;  VOUCHER  SYSTEM 


Problem  15 


The  following  balance  sheet  was  prepared  by  the  bookkeeper  of  the  Johnson 
Shoe  Co. : 

JOHNSON  SHOE  COMPANY 
BALANCE  SHEET,  DECEMBER  31,  1917 


ASSETS 
CAPITAL  ASSETS: 
Plant  and  Equip- 
ment $300,000 
Good-will  50,000  $350,000 


LIABILITIES 
CAPITAL  STOCK: 
Authori25ed  Issue 

CURRENT  LIABILITIES: 


$250,000 


CURRENT  ASSETS: 

Capital  Stock 

Unissued        $ 

Capital  Stock 
Repurchased 

Inventories  of — 
Raw  Materials 
Unfinished  Goods 
Finished  Stock 
Stationery  & 
Supplies 

Accounts  Receivable 

Cash 

15,000 

10,000 

25,000 

3,000 

12,000 

1,000 
44,000 
10,000 

120, 

,000 

(due  Jan.  1, 

1918) 
Accounts  Payable 
Bank  Loans 

SURPLUS : 

Balance,  Jan.  1, 

1917 
Profits  for  year 

$100,000 
40,000 
50,000 

$20,000 
10,000 

$470, 

,000 

30,000 


$470,000 


$150,000  first  mortgage  5%  bonds  were  authorized  and  disposed  of  for  cash 
at  par  on  December  31,  1917.   The  purpose  of  the  issue  was  to  pay  off  the 
mortgage  and  bank  loans,  the  former  being  due  on  the  following  day,  as  indi- 
cated, and  the  latter  on  various  dates  in  January. 

Assuming  the  method  of  stating  surplus  to  be  correct,  rearrange  the  bal- 
ance sheet  to  give  expression  to  the  issue  of  bonds  and  receipt  of  cash  and  to 
whatever  other  adjustments  you  may  think  necessary  to  display  properly  the 
fincmcial  condition  of  the  business  on  December  31,  1917. 

MISCELLANEOUS  QUESTIONS 
Question  67 — A  certain  issue  of  bonds  is  entitled:  "Forty-year  Convertible 
Five  Per  Cent  Gold  Coupon  Bonds.*  Explain  the  significance  of  the  terms  used. 

Copyright,  1917,  The  Ronald  Press  Company 


1-18-2 
Question  68 — Outline  the  nature  of  postings  to  the  Vouchers  Payable  ac- 
count under  the  following  situations: 

(a)  Where  the  amount  column  in  the  voucher  register  contains  the 

amount  appearing  on  the  invoice  before  deducting  the  cash  dis- 
count. 

(b)  Where  the  amount  column  in  the  voucher  register  contains  the 

amount  of  the  invoice  less  cash  discount. 

Question  69 — Explain  how  the  voucher  register  serves  the  double  purpose  of 
both  book  of  original  and  of  final  entry. 

Question  70 — 

(a)  Give,  in  journal  entry  form  (a  journal  entry  need  not  be  made  when 
actually  posting,  however),  the  monthly  postings  from  the  voucher  record  of 
the  Miller  Motor  Car  Co.,  using  imaginary  figures  and  omitting  some  of  the 
distribution  columns. 

(b)  Supposing  the  register  to  contain  a  special  coliimn  for  accounts  pay- 
able, how  would  the  above  entry  be  modified? 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

Record  the  entries  opening  the  books  of  the  Miller  Motor  Car  Co.,  post, 
and  submit  a  balance  sheet  of  the  new  corporation  at  May  1. 

MILLER  MOTOR  CAR  CO. 

SCHEDULE  OF  ACCOUNTS 

EFFECTIVE  MAY  1 


ACCOUNT 

101  Land  306 

102  Buildings 

102R  Reserve  for  Depreciation  of  308 

Buildings  309 

103  Machinery,  Tools,  and  Equipment  321 
103R  Reserve  for  Depreciation  of  322 

Machinery,  Tools,  and  Equipment  326 

104  Office  and  Warehouse  Fixtures  326D 
104R  Reserve  for  Depreciation  of  327 

Office  and  Warehouse  Fixtures 

105  Delivery  Equipment  328R 
105R  Reserve  for  Depreciation  of  De-  329R 

livery  Equipment  351 

151  Good-will  352 

201  Investments  356 

251  Subscriptions — 7%  Preferred  Stock  401 

252  Subscriptions — Common  Stock  402 
271  Sinking  Fund  Assets  403 

301  Inventory  of  Automobiles 

302  Inventory  of  Work  in  Progress  451 

303  Inventory  of  Raw  Materials  501 

304  Inventory  of  Finished  Parts  502 


ACCOUNT 
Inventory  of  Miscellaneous 

Supplies 
Consignment  Stock  Outward 
Advances  on  Consignment-Inward 
Fred  Miller — Personal  Account 
Customers*  Accounts 
Notes  Receivable 
Notes  Receivable  Discounted 
Accrued  Interest  on  Notes 

Receivable 
Reserve  for  Bad  Debts 
Reserve  for  Discounts 
Cash  in  Bank 
Petty  Cash  Fund 
Advances  to  Salesmen 
Unexpired  Insurance 
Rent  Paid  in  Advance 
Prepaid  Interest  on  Notes 

Payable 
Discount  on  Common  Stock 
Capital  Stock — 7%  Preferred 
Capital  Stock — Common 


Copyright,  1917,  The  Ronald  Press  Company 


502U  Unissued  Common  Stock  911 

551  5%  First  Mortgage  Bonds  921 

551U  Unissued  5%  First  Mortgage  Bonds  922 

561  6%  First  Mortgage  Bonds  923 

601  Notes  Payable  924 

611  Bank  Loan  925 

621  Audited  Vouchers  926 

631  Dividends  Payable — Common  Stock 

632  Dividends  Payable — Preferred  Stock  927 

651  Accrued  Interest  on  Notes  Payable  928 

652  Accrued  Bond  Interest  929 

653  Accrued  Taxes  941 

654  Accrued  Pay-roll  942 

661  Miller  Bros.,  Vendor  943 

662  Babcock  Bros.,  Vendor  944 

663  Best  Automobile  Co.,  Vendor  945 
701  Sinking  Fund  Reserve  946 
711  Surplus  947 

801  Sales — Automobiles 

801A  Allowances  on  Sales — Automobiles  961 

802  Sales — Finished  Parts 

802A  Allowances  on  Sales — Finished  962 

Parts  963 

802D  Discounts  on  Sales — Finished  964 

Parts  965 

851  Automobiles — Cost  of  Sales  969 

852  Finished  Parts — Cost  of  Sales  981 

881  Discount  on  Purchases  982 

882  Interest  Received  991 
886  Consignment  Earnings  992 

901  Purchases  of  Raw  Material  996 

902  Purchases  of  Finished  Parts  999 


1-18-3 

Direct  Labor 

Indirect  Labor 

Repairs — Plant  and  Equipment 

Heat,  Light,  and  Power 

Royalties 

Shop  Supplies 

Depreciation  on  Buildings, 
Machinery,  Tools,  and  Equip. 

Insurance 

Taxes 

Miscellaneous  Factory  Expenses 

Salesmen's  Salaries 

Salesmen's  Traveling  Expenses 

Advertising 

Freight-Out 

Delivery  Equipment  Maintenance 

Depreciation  of  Delivery  Equip. 

Miscellaneous  Selling  Expenses 
(including  Rent) 

Depreciation  of  Office  and  Ware- 
house Fixtures 

Office  Salaries 

Salaries  of  Officers 

Stationery  and  Printing 

Bad  Debts 

Miscellaneous  General  Expenses 

Bond  Interest 

Other  Interest  Paid 

Trading  Account — Automobiles 

Trading  Account — Finished  Parts 

Profit  and  Loss 

Dividends 


322A  District  #1 
322B  District  #2 
322C  District  #3 
322D  District  #4 


CUSTOMERS  LEDGER 

322E  District  #5 

322F  District  #6 

322G  District  #7 

322H  District  #8 


1-account  pages  991-2;  996-9 

2-account  pages  251-2,  271;  309-321;  322-6;  601-611;  621-631 

3-account  pages,  balance 

The  following  books  of  account  will  be  kept: 

1.  Six-coliamn  Journal  (Form  4) 

2.  Sales  Book  (Form  5) 

3.  Return  Sales  Book  (Form  6) 

4.  Record  of  Audited  Vouchers  (Forms  8  and  8-a) 

5.  Record  of  Cash  Receipts  (Form  11) 

6.  Record  of  Checks  Drawn  (Form  12) 

7.  Ledger  pages  (Forms  13,  14,  and  15) 

In  addition  there  may  be  assumed  to  exist  a  stores  ledger  and  other  cost 
records  which  the  student  will  not  keep  and  which  will  be  explained  later. 


Copyright,  1917,  The  Ronald  Press  Company 


1-18-4 
SUMMARY  OF  TRANSACirONS 

MAY  1 
The  board  of  directors  has  issued  a  call  for  50%  of  the  unpaid  preferred 
stock  subscriptions  to  be  paid  in  cash  today.   Receive  in  response  thereto — 

P.  J.  Kirkwood  $  7,500.00 

B.  F.  Goodrich  Co.  6,000.00 

A.  J.  Smallton  6,500.00 

S.  K.  Stevenson  5,000.00 


125,000.00 

In  this  connection  an  instalment  ledger  may  be  kept  and  the  detail  items 
posted  thereto.   (Credit  "Subscriptions — 7%  Preferred  Stock"  in  cash  book  for 
$25,000.) 

MAY  2 

In  the  corporation  work  the  purchase  register  and  creditors  ledger  will 

not  be  used,  the  audited  voucher  record  replacing  them.   Accounts  formerly 

carried  in  the  creditors  ledger  will  be  transferred  to  the  audited  voucher 

record,  as  follows: 

DISCOUNT  SUNDRY    GENERAL 

NO.  DATE         NAME  DETAIL     AMOUNT  ON  PURCH.  ACCOUNTS   LEDGER 

1  May  1  N.  Y.  Auto  Sup.  Co.  Taken  over  $29,500.00  $ Audited  $29,500.00 

from  Vouchers 

Miller 

Brothers 

2  "   Weil-Built  Auto  Co.  4,850.00   150.00     "      5,000.00 

3  "   Star  Auto  Co.  1,580.00  "       1,580.00 

(It  is  assumed  that  the  proper  voucher  will  be  made  immediately  for  each 
purchase  whether  for  cash  or  on  account.   All  vouchers  should  be  entered  in 
the  audited  voucher  record  and  the  payment  recorded  in  the  cash  book.   No  dis- 
bursement can  be  made  except  by  voucher  properly  prepared. 

It  is  the  intention  of  the  company  to  have  sufficient  cash  on  hand  to  take 
advantage  of  all  possible  cash  discounts.   Therefore,  in  entering  purchases  on 
the  voucher  record,  the  NET  amount  of  the  invoice  should  be  entered  in  the 
"Amount"  column;  the  cash  discount  should  be  entered  in  the  "Discount  on  Pur- 
chases" column;  and  the  TOTAL  amount  of  the  bill  should  be  charged  to  the 
proper  accounts  in  the  distribution  coliimns.   Thus  at  any  time  the  total  of 
the  "Amount"  and  "Discount"  columns  will  be  equal  to  the  total  of  all  distri- 
bution columns.) 

Send  check  to  District  Manager  #1  for  salesmen's  traveling  expenses,  per 
reports,  $168.   (Voucher  #4  made  and  check  #1  issued.) 

Receive  from  District  #1  $110  for  C.  0.  D.  shipment  to  John  Lange  of  April  8. 

(For-  sales  purposes  the  country  has  been  divided  into  sales  districts.   In 
the  sales  ledger  an  account  will  be  kept  with  each  district  to  which  all  sales 
therein  will  be  charged  and  returns  credited  per  the  district  managers'  re- 
ports.  Charges  and  credits  will  be  the  totals  of  these  reports  instead  of 
each  individual  item  as  would  be  the  case  in  actual  practice,  thus  condensing 
the  clerical  work.   Accounts  now  on  books  are  in  District  #1.) 

Send  check  to  Weil-Built  Automobile  Co.  for  $5,000,  less  the  3%  discount 
allowed  by  them. 

Copyright,  1917,  The  Ronald  Press  Company 


1-18-5 

MAY  3 

The  board  of  directors  has  authorized  the  purchase  of  the  Babcock  Bros, 
automobile  plant  for  $175,000,  payable  as  follows:  $5,000  down  at  date  of 
signing  the  contract  May  3;  2  notes  for  $10,000  each,  due  May  31  and  June  30 
respectively,  with  interest  at  6%  per  annum;  balance  to  be  paid  in  bonds  of 
this  company.  By  resolution  duly  carried  at  a  stockholders'  meeting  a  bond 
issue  of  $150,000  is  authorized,  to  consist  of  a  serial  issue  of  15  first 
mortgage  gold  bonds  for  $10,000  each,  maturing  yearly  during  15  years,  with 
interest  at  5%,  payable  November  1  and  May  1  (journal).   The  board  has  ap- 
praised the  land  at  $25,000,  buildings  $50,000;  machinery,  tools,  etc.,  $100,- 
000.  A  voucher  is  made  for  $5,000  and  check  issued.   The  15  bonds  are  issued 
in  favor  of  Babcock  Bros.,  and  also  the  two  notes. 

Sold  the  2  automobiles  of  the  Midland  Motor  Co.  for  $1,500  each  to  George 
Heck  (District  No.  1  account).   Sent  the  following  account  sales  with  check 
for  the  net  proceeds: 

ACCOUNT  SALES 
SALES  $3,000.00 

DEDUCT— Commission  $  300.00 

Freight  100.00 

Advances  1,000.00   1,400.00 


NET  PROCEEDS  remitted  $1,600.00 


5,025.00 

N 

2%  15 

R 

N 

30 

1,687.50 

n 

2%  10 

n 

n 

30 

1,927.80 

n 

2%  10 

n 

n 

30 

1,836.00 

n 

2%  10 

N 

N 

60 

MAY  4 
Received  the  following  shipments: 
Stahl  Steel  Works,  Raw  Material       $3,286.85  terms  1%  10  days,  net  30  days 
Automobile  Accessories  Mfg.  Co. 

Finished  Parts 
B.  F.  Goodrich  Co.,  Finished  Parts 
Standard  Wheel  Co.,  Finished  Parts 
Washed  Coal  Co.,  Heat,  Light,  and  Power  1,836.00 

It  may  be  assumed  that  vouchers  have  been  made  on  receipt  of  goods.   They 
should,  therefore,  be  entered  at  once  in  the  voucher  register. 

MAY  5 

Babcock  Bros,  have  offered  to  accept  $19,850  as  full  payment  of  their 
notes  due  May  31  and  June  30  respectively.  A  special  meeting  of  the  board  is 
called  and  by  resolution  the  treasurer  is  authorized  to  accept  same.  Where- 
upon the  board  authorizes  the  treasurer  to  pay  the  amount  by  check  and  issues 
a  call  for  50%  on  the  preferred  stock  and  20%  on  the  common  stock,  to  be  paid 
in  cash  May  8.   (No  entry  on  the  general  books  until  cash  is  received.) 

The  sales  for  the  week  per  district  managers'  reports  are: 

DISTRICT     CARS  FINISHED  PARTS 

1       $795.65 

3       541.20 

4  $6,000.00  286.75 

Jeunes  Garage  Co. ,  being  unable  to  sell  the  two  automobiles  consigned  to 
them  on  April  17,  returned  them.   (Debit  Inventory  of  Automobiles  account.) 

Copyright,  1917,  The  Ronald  Press  Company 


1-18-6 


MAY  7 
A  voucher  check  is  issued  to  order  of  "Pay-roll" 
veek  ending  May  5,  as  follows: 

Direct  Labor 

Indirect  Labor 

Repairs — Plant  and  Equipment 

Heat,  Light,  and  Power 

Salesmen's  Salaries 

Office  Salaries 


for  the  total  pay-roll. 


$2,871.46 

1,313.89 

1,082.75 

126.00 

385.00 

87.50 


$5,866.60 


Also  pay  freight  bills  rendered  by  Penn.  R.  R.  Co.  amounting  to  $331.26, 
of  which  $98.43  is  chargeable  to  Raw  Materials  and  $232.83  to  Finished  Parts, 


Solution  to  Assignment  1-17-1 

ENTRIES  TO  OPEN  THE  BOOKS  OF  MILLER  MOTOR  CAR  CO. 

MILLER  MOTOR  CAR  CO. 

'  Organized  under  the  laws  of 

THE  STATE  OF  NEW  JERSEY 

With  an  Authorized  Capital  Stock  of 

$200,000.00 

divided  into  1,000  Shares  of  7%  Preferred  Stock 

and  1,000  Shares  Common  Stock,  Par  Value  $100.00 


(1) 
Subscriptions — 7%  Preferred  Stock 
To — 7%  Preferred  Stock 
To  record  subscriptions  as  follows: 


$100,000.00 


$100,000.00 


Fred  Miller 
August  Miller 
P.  J.  Kirkwood  Co. 
B.  F.  Goodrich  Co. 
A.  J.  Smallton 
S.  K.  Stevenson 

Total 


$  25,000.00 
25,000.00 
15,000.00 
12,000.00 
13,000.00 
10,000.00 

$100,000.00 


Copyright,  1917,  The  Ronald  Press  Company 


(2) 
Subscriptions  to  Common  Stock 
To — Common  Stock 
To  record  subscriptions  as  follows: 


$100,000.00 


1-18-7 


$100,000.00 


Fred  Miller 
August  Miller 
P.  J.  Kirkwood 
S.  K.  Stevenson 
Fred  Higgins 
Frank  Holloway 

Total 


$  36,600.00 
13,400.00 
10,000.00 
10,000.00 
15,000.00 
15,000.00 

$100,000.00 


(3) 

Office  and  Warehouse  Fixtures  1,450.00 

Delivery  Equipment  1,750.00 

Good-will  66,000.00 

Inventory  of  Automobiles  30,000.00 

Inventory  of  Finished  Parts  5,890.00 
Inventory  of  Miscellaneous  Supplies  (Stationery 

and  Printing)  300.00 

Consignment  Stock  Outward  3,200.00 

Advances  on  Consignments  Inward  1,100.00 

Customers  Ledger  35,542.00 

Notes  Receivable  10,100.00 

Cash  in  Bank  3,634.00 

Petty  Cash  Fund  100.00 

Unexpired  Insurance  50.00 

Rent  Paid  in  Advance  200.00 
To — Miller  Bros.,  Vendor 

To  record  assets  acquired  by  purchase  per  bill 

of  sale  dated See  resolution  of 

Board  of  Directors  dated and  recorded 

in  their  Minute  Book,  page 


properly  prepared. 


(4) 


Miller  Bros.,  Vendor 

TO — Notes  Receivable  Discounted 
Notes  Payable 
Bank  Loan 
Audited  Vouchers 

Interest  Accrued  on  Notes  Payable 
Taxes  Accrued 
To  record  the  liabilities  assumed  per  bill 
of  sale  above  referred  to. 


59,316.00 


159,316.00 


10,000.00 

10,000.00 

3,000.00 

36,080.00 

36.00 

200.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-18-8 
(5) 
Miller  Bros.,  Vendor  $100,000.00 

To — Subscriptions — 7%   Preferred  Stock  $  50,000.00 

Subscriptions — Common  Stock  50,000.00 

To  record  the  issue  of  500  shares  of  7%  Pre- 
ferred Stock,  par  value  $100,  and  500 
shares  of  Common  Stock,  par  value  $100,  in 
full  payment  for  net  assets  acquired  under 
bill  of  sale  above  referred  to. 


Solution  to  Problem  13 

(1) 
Good-will  $15,000.00 

To~Fred  Smith  $  7,500.00 

Amos  Williams  7,500.00 

To  record  value  of  good-will  on  transfer  of 
net  assets  to  Grocers'  Company. 

(2) 

Grocers'  Company,  Vendee  63,898.00 

TO — Real  Estate  6,000.00 
Furniture  and  Fixtures  1,790.00 
.Good-will  y  .15,000.00 
Merchandise  6,713.00 
Accounts  Receivable  8,552.00 
Notes  Receivable  9,009.00 
Cash  in  Bank  6,790.24 
Cash  on  Hand  43.76 
To  record  transfer  of  assets  to  Grocers'  Com- 
pany, per  bill  of  sale  dated 

(3) 
Notes  Payable  2,000.00 

Accounts  Payable  1,898.00 

To — Grocers'  Company,  Vendee  3,898.00 

To  record  assumption  of  liabilities  by  the         "^ 
Grocers'  Company. 

(4) 
Grocers'  Company — Capital  Stock  \j     50,000.00 

To — Grocers'  Company,  Vendee  50,000.00 

To  record  receipt  of  payment  in  full  for  net 
assets  transferred. 

(5) 
Fred  Smith — Capital  Account  27,500.00^ 

Amos  Williams — Capital  Account  22,500.00 

To — Grocers'  Company — Capital  Stock  ,  50,000.00 

To  record  distribution  of  stock  to  partners. 


Copyright,  1917,  The  Ronald  Press  Company 


1-18-9 
ANSWERS  TO  QUESTIONS 
Answer  to  Question  58 — 

(a)  A  corporation  must  secure  the  consent  of  the  State  before  engaging  in 
business,  and  is  subject  to  certain  regulations  which  do  not  affect  a  partner- 
ship.  A  partnership  may  be  organized  without  consulting  any  public  authority. 
It  is  simply  a  contract  between  the  members. 

(b)  Partners  are  usually  liable  for  partnership  debts  to  the  full  extent 
of  their  private  fortunes,  while  the  owners  of  the  corporation  are  usually 
liable  only  for  the  amount  of  their  subscriptions. 

(c)  Partnerships  may  engage  in  any  business;  corporations  are  restricted 
to  the  purposes  set  forth  in  their  charters. 

(d)  Each  partner  is  entitled  to  share  in  the  management.   In  a  corporation 
the  board  of  directors  controls  the  current  operations.   In  a  corporation  the 
stockholders  vote  in  proportion  to  their  holdings  for  directors  who  alone  have 
authority  over  the  corporate  property  and  business.   These  directors  appoint 
officers  to  transact  the  business.   The  stockholders,  as  such,  have  no  au- 
thority in  the  corporate  affairs.  Each  partner  is  the  agent  of  the  others, 
and  may  perform  any  act  within  the  scope  of  the  partnership  and  by  that  act 
bind  the  other  partners. 

(e)  Partners  cannot  dispose  of  their  interests  without  the  consent  of  the 
other  members.   Stockholders  can  sell  their  shares  of  stock  at  will. 

(f )  The  death,  insanity,  or  insolvency  of  a  member  of  a  firm  dissolves 
the  firm.   The  death,  insolvency,  or  insanity  of  a  stockholder  has  no  effect 
on  the  continuity  of  the  life  of  a  corporation. 

(g)  A  corporation  has  an  entity  separate  from  its  members.  It  can  sue  its 
members  and  can  be  sued  by  them.  Partners  cannot  sue  the  partnership  of  which 
they  are  a  member,  nor  can  the  partnership  sue  one  of  its  members. 

Answer  to  Question  59 — The  difference  of  $5,000  would  be  a  loss  to  be 
charged  to  the  partners  in  accordance  with  the  provision  in  their  partnership 
agreement  covering  the  division  of  profits  and  losses. 

Answer  to  Question  60 — 

(a)  The  values  of  various  assets  may  have  been  overstated  on  the  books  of 
the  firm  on  account  of  insufficient  provisions  for  depreciation,  failure  to 
distinguish  properly  between  capital  and  revenue  expenditures,  over-valuation 
of  inventory,  etc. 

(b)  If  the  stock  is  to  remain  in  the  hands  of  a  few  parties,  they  may 
wish  to  capitalize  merely  for  a  nominal  amount,  the  proportionate  shares  re- 
maining the  same  whether  a  high  or  low  capitalization  exists. 

(c)  The  earning  power  of  the  business  might  be  such  as  to  warrant  only  the 
price  paid;  i.  e. ,  the  capitalized  earning  power  might  be  less  than  the  value 
of  the  net  assets  per  books.   The  book  figures,  however,  might  still  be  prop- 
erly valued  from  the  viewpoint  of  the  going  concern,  although  if  the  business 
were  liquidated  the  book  values  might  not  be  realized. 

Answer  to  Question  61— A  vendor  is  one  who  by  bill  of  sale  transfers  prop- 
erty to  another.   The  vendee  is  the  party  to  whom  the  property  is  transferred. 
The  terms  are  used  to  differentiate  purchases  or  sales  in  the  ordinary  course 
of  business  from  the  occasional  purchase  or  sale  of  a  plant  or  other  large 
asset  or  a  complete  going  concern. 

Copyright,  1917,  The  Ronald  Press  Company 


1-18-10 
BONDS 

NATURE  OF  BONDS — If  a  corporation  borrows  money,  notes  or  bonds  may  be 
given  to  evidence  the  transaction.   Notes  are  usually  preferred  when  one  or 
more  of  the  following  conditions  are  present:  (1)  a  small  amount,  (2)  a  few 
persons  willing  to  advance  the  sum,  or  (3)  a  short  period  to  run.   Bonds  are 
superior  where  the  amount  (1)  is  large,  (2)  is  secured  from  a  number  of 
people,  and  (3)  runs  for  a  period  of  years.   Bonds  are  more  formal  than  notes, 
are  executed  under  seal,  possess  a  larger  degree  of  marketability,  and  are 
usually  secured. by  a  lien  on  property  of  the  borrower.   Bonds  have  a  par  value 
similar  to  capital  stock,  but  the  range  of  par  values  is  much  larger,  running 
usually  from  $100  to  $10,000. 

Bonds  are  a  direct  obligation  of  the  corporation  and  therefore  differ  ma- 
terially from  stock.   Moreover,  interest  on  bonds  must  be  paid  before  any 
dividends  can  be  declared,  and  in  case  of  liquidation  bondholders  are  usually 
secured  as  to  principal. 

AUTHORIZATION — Unless  otherwise  provided  by  statute  or  by-laws,  the  power 
to  issue  bonds  lies  in  the  board  of  directors.   A  provision  is  usually  found 
in  the  by-laws  making  necessary  the  consent  of  the  stockholders  in  case  the 
issue  of  bonds  necessitates  the  mortgaging  of  corporate  property. 

TRUST  DEED — The  trust  deed  is  an  instrument  conveying  title  of  properties 
of  a  borrowing  corporation  to  a  trustee  for  the  purpose  of  insuring  the  rights 
of  bondholders.   It  contains  full  details  of  the  contract  between  corporation 
and  bondholders. 

KINDS  OF  BONDS — In  general,  bonds  may  be  divided,  in  terms  of  negotia- 
bility and  form,  into  two  classes:  coupon  and  registered  bonds. 

1.  Coupon  bonds  are  usually  payable  to  bearer  both  as  to  principal  and 
interest,  although  in  some  cases  they  are  registered  as  to  principal.   Coupons 
are  the  interest  warrants  attached  to  the  bond  and  are  "clipped"  when  accrued 
and  treated  as  cash  by  banks.   The  coupons  are  numbered  consecutively. 

2.  Owners  of  registered  bonds  are  recorded  on  the  books  of  the  corpora- 
tion, and  any  changes  in  the  ownership  must  also  be  recorded  on  its  books. 
This  is  accomplished  by  surrendering  the  old  bond,  properly  indorsed,  and  re- 
ceiving a  new  one  in  exchange.  A  registered  bond  is,  therefore,  non-negoti- 
able.  Interest  is  paid  to  the  registered  bondholders  by  check. 

From  the  viewpoint  of  underlying  security,  bonds  may  be  fully  secured, 
partially  secured,  or  unsecured. 

1.  The  secured  bond  is  the  most  common  type.   Its  security  may  be  personal 
property  (equipment  trust  bonds,  collateral  trust  bonds,  etc.),  real  property 
(terminal  bonds,  construction  bonds,  etc.),  or  both  real  and  personal  property 
(general  mortgage  bonds,  etc.).   The  security  usually  extends  to  both  princi- 
pal and  interest. 

2.  Partially  secured  bonds  are  illustrated  by  income  bonds.   Here  the 
principal  is  usually  secured  by  the  terms  of  the  trust  deed,  but  interest  is 
wholly  dependent  on  the  earning  of  income  by  the  corporation.   The  interest 
may  or  may  not  be  cumulative. 

Copyright,  1917,  The  Ronald  Press  Company 


1-18-11 
3.  Unsecured  bonds  are  termed  "debentures*  or  debenture  bonds.  While  they 
are  obligations  of  a  corporation,  they  are  not  ordinarily  secured  by  a  lien  or 
mortgage  on  particular  assets  as  are  the  secured  and  partially  secured  bonds. 
If  default  occurs,  either  as  to  principal  or  interest,  debenture  bondholders 
cannot  foreclose. 

Other  types  of  bonds  commonly  referred  to  are: 

1.  Convertible  bond — one  which  may  be  converted  under  stated  condi- 

tions into  some  security  of  the  corporation,  usually  stock. 

2.  Serial  bonds  are  those  which  are  retired  serially — a  certain  number 

annually  until  the  entire  issue  has  been  redeemed. 

3.  Consolidated  bonds  are  bonds  issued  in  exchange  for  various  other 

types  of  bonds  in  effecting  a  simplification  of  the  financial 
structure. 

4.  Redeemable  bonds  are  those  which  may  be  purchased,  under  certain 

conditions,  by  the  issuing  corporation,  before  their  normal  ma- 
turity. 

5.  Interest  bonds  are  bonds  given  for  interest  payments  in  lieu  of 

cash. 

6.  Refunding  bonds  are  bonds  exchanged  for  old  issues  matured  or  re- 

tired. 

AMOUNT  OF  BONDS — Various  state  laws  prohibit  the  issue  of  bonds  beyond  a 
certain  limit.   For  instance  in  Illinois  the  amount  of  bonds  must  not  exceed 
the  amount  of  capital  stock.   In  the  case  of  public  utilities,  most  states  re- 
quire that  the  amounts  and  kinds  of  bonds  issued  must  bear  the  approval  of  the 
utilities  commission  of  that  state. 

ENTRIES  REQUIRED — The  accounting  for  bonds  is  comparatively  simple.   Bonds 
may  be  paid  for  outright  or  in  instalments.   For  registered  bonds  a  subsidiary 
record  should  be  kept,  a  page  being  devoted  to  each  registered  bondholder. 
The  following  cases  are  illustrative. 

Assume  that  in  all  these  cases,  the  authorized  issue  is  $500,000.   The 
first  entry  will,  therefore,  be: 

-July  1,  1917- 

Unissued  First  Mortgage  Bonds  $500,000.00 

To — First  Mortgage  6%  Bonds  $500,000.00 

To  record  authorized  issue  of  6%  Thirty- 
Year  First  Mortgage  Bonds.   See  minutes. 
Board  of  Directors,  page ;  also  con- 
current action  at  stockholders'  meeting 
held  on 

CASE  1 — Part  of  the  bonds  are  sold  at  par  for  cash: 

Cash  (as  received)  $400,000.00 

To — Unissued  First  Mortgage  Bonds  $400,000.00 

To  record  payment  of  entire  issue  dis- 
posed of. 

Copyright,  1917,  The  Ronald  Press  Company 


1-18-12 
CASE  2 — Others  of  the  bonds  are  sold  at  par  and  accrued  interest  for  cash: 

-September  1,  1917- 
Cash  $  50,500.00 

To — Unissued  First  Mortgage  Bonds  $  50,000.00 

Interest  Accrued  on  First  Mortgage 

Bonds  500.00 

To  record  sale  of  50  bonds  at  par  and  ac- 
crued interest. 

CASE  3 — If  the  bonds  are  subscribed  for  smd  paid  in  instalments: 

Bond  Subscriptions  $500,000.00 

To — Unissued  First  Mortgage  Bonds  $500,000.00 

To  record  subscriptions  to  bonds  as  fol- 
lows (give  details). 

Cash  100,000.00 

To — Bond  Subcriptions  100,000.00 

To  record  receipt  of  first  instalment. 

Cases  involving  discount  and  premium  on  bond  sa?.es  will  be  taken  up  later. 

VOUCHER  SYSTEM 

DEFINITION — A  voucher  system  is  a  method  of  keeping  an  orderly  record  of 
every  expenditure  incurred  by  a  business.   This  system  includes  the  use  of  a 
"voucher"  supporting  each  check  drawn  and  a  "voucher  record"  in  which  the 
vouchers  are  entered  and  summarized. 

KINDS  OF  VOUCHERS — The  voucher  consists  usually  of  a  paper  on  which  are 
entered  the  details  of  the  expenditure,  including  a  distribution  to  the 
various  ledger  accounts  affected,  number  of  the  voucher  (vouchers  are  numbered 
consecutively) ,  number  of  the  check,  and  signatures  of  clerks  and  officials 
who  have  prepared  and  checked  the  voucher  and  approved  it  for  payment.   The 
original  invoice  and  other  necessary  supporting  data  are  attached  to  the 
voucher  before  it  is  finally  filed  av;ay.   Before  the  voucher  is  paid,  it  is 
filed  numerically  in  the  "Unpaid  Vouchers"  file  and  after  payment  in  the  "Paid 
Vouchers"  file.   In  most  cases  vouchers  are  prepared  after  invoices  have  been 
checked  and  are,  therefore,  customarily  referred  to  as  "audited  vouchers."   In 
some  cases  the  voucher  is  prepared  when  payment  is  made  ;  under  such  circum- 
stances there  are  no  "unpaid  audited  vouchers." 

A  "voucher  check"  is  a  combined  voucher  and  check,  similar  in  form  to  the 
voucher  described  above,  except  that  the  outer  face  of  the  voucher  now  repre- 
sents a  check.   The  advantage  of  this  form  is  that  the  creditor's  indorsement 
receipts  both  the  payment  and  details  thereof.   There  is  an  attempt  in  some 
cases  to  have  the  ordinary  voucher  receipted  by  enclosing  it  with  the  check 
sent ;  however,  the  voucher  may  not  be  returned,  or  more  often  not  promptly  re- 
turned, and  thus  the  files  will  be  incomplete. 

Vouchers  may  be  made  in  duplicate,  triplicate,  etc.,  depending  on  the 
particular  system  followed. 

Copyright,  1917,  The  Ronald  Press  Company 


1-18-13 

VOUCHER  RECORD  OR  REGISTER — The  voucher  register  is  a  book  of  original  en- 
try in  which  all  vouchers  prepared  are  entered  in  numerical  order.   The  money 
columns  of  this  register  usually  consist  of  an  amount  column,  a  discount 
column,  and  a  series  of  distribution  columns  headed  by  the  names  of  the  most 
common  expenditure  accounts.  Expenditures  not  falling  under  these  headings 
are  put  in  a  special  column,  usually  at  the  extreme  right  of  the  page,  to- 
gether with  the  name  of  the  account  to  be  debited  opposite  the  amount. 

Postings  are  made  from  the  voucher  record  periodically  (usually  monthly), 
the  amounts  posted  being  the  totals  of  the  various  distribution  columns,  ex- 
cept that  in  the  miscellaneous  or  sundry  column  at  the  extreme  right  each  item 
must  be  posted  individually  to  the  account  named.   The  total  of  the  amount 
column  is  posted  to  the  credit  of  an  Audited  Vouchers  or  Vouchers  Payable  ac- 
count in  the  general  ledger.   The  total  of  the  discount  column  is  posted  to  the 
credit  of  Discount  on  Purchases.   That  portion  of  a  check  representing  a  dis- 
count not  taken  advantage  of  will  be  debited  to  the  Discount  or  Purchases  ac- 
count. 

By  providing  contiguous  to  the  amount  (or  Vouchers  Payable)  column  a 
column  headed  "Accounts  Payable"  or  "Creditors  Ledger,"  a  subsidiary  ledger 
can  be  maintained  for  those  few  creditors  with  whom  running  or  current  ac- 
counts are  kept.   Otherwise,  since  usually  a  check  is  eventually  made  out  for 
each  voucher,  the  voucher  register  may  serve  as  a  book  of  final  entry  by  in- 
serting a  "Date  Paid"  or  "Check  Number"  column;  the  sum  of  the  vouchers  not 
indicated  "paid"  should  equal  the  balance  of  the  Audited  Vouchers  (or  Vouchers 
Payable)  account  in  the  general  ledger. 

The  discount  column  may  be  omitted  from  the  voucher  register  and  in  that 
case  would  appear  in  the  cash  book.  This  would  be  desirable  if  not  all  dis- 
counts are  taken  advantage  of. 

REFERENCES : 

Bennett,  pages  197-251 

Esquerre,  pages  34-38 

Gilman,  pages  203-211 


Copyright,  1917.  The  Ronald  Press  Company 


1-19-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  19 
RECORDS  OF  A  MANUFACTURING  BUSINESS 


MISCELLANEOUS  QUESTIONS 

Question  71 — Many  manufacturing  concerns  charge  freight-inward  direct  to 
the  materials  accounts.  Do  you  consider  this  correct  accoiinting  practice? 

Question  72 — A  certain  manufacturing  business  builds  several  machines  for 
its  own  use.   Three  methods  are  suggested  as  proper  for  ascertaining  the  value 
at  which  they  are  to  be  charged  to  the  Machinery  accoimt: 

(a)  On  the  basis  of  prime  cost  (raw  materials  and  labor). 

(b)  On  the  basis  of  prime  cost  plus  a  portion  of  factory  overhead  ex- 

penses which  have  been  distributed  in  the  usual  way. 

(c)  On  the  basis  of  the  cost  of  the  machines  if  purchased  on  the  open 

market,  i.e.,  manufactured  by  another  business. 
What  one  of  these  bases,  if  any,  is  the  correct  one,  in  your  opinion? 

Question  73 — A  company  purchased  a  tract  of  land  for  $20,000  and  erected  a 
factory.   Three  years  later  several  other  companies  locating  near  them  paid 
from  1/3  to  1/2  more  for  similar  tracts.   The  management  desires  to  raise  the 
book  value  to  $25,000  on  the  ground  that  the  land  is  fully  worth  that  sum. 
The  matter  is  referred  to  you,  as  the  accountant,  for  an  opinion. 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

SUMMARY  OF  TRANSACTIONS 

MAY  8 

Receive  on  account  of  preferred  stock  Call  No.  2,  cash  as  follows: 

P.  J.  Kirkwood  %   7,500.00 

B.  P.  Goodrich  Co.  6,000.00 

A.  J.  Smallton  6,500.00 

S.  K.  Stevenson  5,000.00 


Total  $25,000.00 


On  account  of  common  stock  Call  No.  1: 

P.  J.  Kirkwood  %   2,000.00 

S.  K.  Stevenson  2,000.00 

Fred  Higgins  3,000.00 

Frank  Holloway  3,000.00 


Total  $10,000.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-19-2 
District  managers  report  the  following  collections  for  the  past  week: 

Cash  (District  #1)  $2,024.90 

Discounts  Allowed  (District  #1)       34.25  $2,059.15 


Notes  Receivable  (District  #1)  3,000.00 


Total  $5,059.15 


(Enter  cash  and  discount  in  the 
cash  book,  notes  receivable  in 
the  j  ournal . ) 

Increase  petty  cash  fund  by  a  check  in  favor  of  petty  cashier  for  $100. 

MAY  9 
Insurance  on  the  factory  is  taken  out  from  the  National  Fire  Insurance  Co, 
Premium  for  one  year  $870,  net  5  days. 

MAY  10 
A  national  advertising  campaign  is  authorized  by  a  resolution  of  the  board 
of  directors,  who  appropriate  $70,000  for  this  purpose.   The  contract  is 
awarded  to  the  U.  S.  Advertising  Co.,  and  an  initial  payment  of  $1,000  is 
made.   The  remainder  will  be  paid  as  the  monthly  bills  are  received, 

MAY  11 
Bank  reports  that  the  note  of  the  James  Garage  Co.  for  $10,000,  which  was 
discounted,  has  been  paid. 

MAY  12 
Received  shipments  as  follows: 

B.  F.  Goodrich  Co.,  Finishtd  Parts     $5,640.00  terms  2%  10  days,  net  30  days 
Automobile  Accessories  Manufacturing 

Co. ,  Finished  Parts 
Standard  Wheel  Co.,  Finished  Parts 
Stahl  Steel  Works,  Raw  Material 
Best  Drop  Forge  Works,  Raw  Material 
Specialties  Manufacturing  Co., 

Finished  Parts 

MAY  14 
Summary  of  district  managers'  sales  reports  for  the  week: 

FINISHED  PARTS 

$  398.68 

125.00 

768.23 

478.44 

95.40 


7,732.75 

H 

2%  15 

n 

n 

30 

2,099.50 

n 

2%  10 

n 

n 

30 

1,787.00 

m 

1%  10 

n 

n 

30 

2,701.25 

n 

2/2%  5 

n 

N 

30 

1,202.85 

n 

June  1 

DISTRICT 

CARS 

#1 

$  4,885.00 

2 

4,300.00 

3 

2,600.00 

4 

7,900.00 

5 

900.00 

$20,585.00  $1,865.75 


Copyright,  1917,  The  Ronald  Press  Company 


1-19-3 


Pay-roll  for  the  week: 

Factory: 

Direct  Labor 

Indirect  Labor 

Repairs 

Heat,  Light,  and  Power 
Office: 

Salesmen's  Salaries 

Office  Salaries 


$3,754.32 
2,643.12 
765.43 
138.00  $7,300.87 


$  412.50 
115.25 


527.75 


$7,828.62 


Pay  our  note  for  $10,000  in  favor  of  Weil-Built  Auto  Co.,  with  interest  for 
30  days  at  6^.      (Charge  interest  to  Accrued  Interest  on  Notes  Payable.) 

Pay  Penn.  R.  R.  Co,  $547.28,  of  which  $207.50  is  chargeable  to  Raw  Ma- 
terials and  $339.78  to  Finished  Parts.   Also  pay  the  Grand  Trunk  R.  R.  $58.75 
freight  on  finished  parts.  Petty  cashier  surrenders  receipts  for  $187.50,  of 
which  $68  is  for  stationery  and  printing,  $37.25  for  miscellaneous  general  ex- 
penses, and  $82.25  for  local  advertisinc.   Check  for  $487.50  is  issued  to  him. 
The  $300  additional  is  for  the  purpose  of  increasing  the  petty  cash  fund  to 
$500. 

MAY  15 


Report  of 

collections 

for  the  past  week: 

TOTAL  CASH 

DISCOUNTS 

CREDITS  TO 

NOTES  RECEIVED 

DISTRICT 

CASH 

ALLOWED 

CUSTOMERS 

ON  ACCOUNT 

#1 

$1,465.15 

$27.13 

$1,492.28 

$1,750.00 

3 

1,647.40 

32.18 

1,679.58 

1,700.00 

4 

1,304.20 

5.96 

1,310.16 

2,200.00 

Total 

$4,416.75 

$65.27 

$4,482.02 

$5,650.00 

Pay  the  following  bills: 
Stahl  Steel  Works 
B.  F.  Goodrich  Co, 
Standard  Wheel  Co. 
Washed  Coal  Co. 
National  Fire  Insurance 


Co. 


Invoice  of  May  4 


MAY  16 

Receive  shipment  of  machinery  from  the  Edmond  Machinery  Co.   In  accordance 
with  the  terms  of  the  purchase,  remit  check  for  $2,000  and  our  note  for  $3,500 
for  30  days,  interest  at  5%,   for  the  balance  of  the  purchase  price.   Buy  of 
Williams  &   Richards,  shop  supplies,  to  be  delivered  immediately,  terms  net  30 
days,  amount  of  invoice  $356.25. 

MAY  17 

Issue  check  to  August  Miller  to  pay  salesmen's  traveling  expenses,  per  re- 
ports rendered,  $307.81. 


Copyright,  1917,  The  Ronald  Press  Company 


1-19-4 
MAY  18 

Shipments  received  from: 
B.  F.  Goodrich  Co.,  Finished  Parts     $4,775.00  terms  2%  10  days,  net  30  days 
Automobile  Accessories  Manufacturing 


Co.,  Finished  Parts 
Specialties  Manufacturing  Co., 

Finished  Parts 
New  Idea  Lamp  Co.,  Finished  Parts 


6,923.50 

R 

2%  15 

2,882.50 

n 

June  1 

827.75 

N 

2%  10 

30 


60 


MAY  19 
Sales  for  week  per  district  managers'  '•eports 


DISTRICT 

CARS 

#1 

$  4,200.00 

2 

14,900.00 

3 

3,900.00 

4 

11,560.00 

5 

13,125.00 

7 

7,000.00 

$54,685.00 

FINISHED  PARTS 
$1,033.75 
401.28 
968.17 
632.23 
1,142.75 
354.50 


$4,532.68 


Pay  invoices  as  follows: 

Automobile  Accessories  Mfg.  Co.  Invoice  May  4 
Best  Drop  Forge  Works  "     "12 

Borrow  $10,000  from  the  First  National  Bank.   Give  our  demand  note  bearing 
5%  interest. 

MAY  21 
Pay-roll  for  week: 

Factory: 

Direct  Labor 

Indirect  Labor 

Repairs,  Plant  and  Equipment 

Heat,  Light,  and  Power 

Unloading  and  setting  up  machinery  (charge 
Machinery,  Tools,  and  Equipment) 
Office: 

Salesmen's  Salaries 

Office  Salaries 


Freight  bills  for  the  week:  $87.38  paid  to  Grand  Trunk  R.  R.  Co.  and 
chargeable  to  Finished  Parts;  $352.02  paid  to  the  Penn.  R.  R.  Co.,  of  which 
$57.65  is  chargeable  to  Raw  Material  and  $294.37  to  Finished  Parts.  Best  Drop 
Forge  Works  have  refused  to  allow  the  discount  taken  on  their  invoice  of  May 
12,  as  payment  was  not  made  within  the  time  limit.  Send  them  check  for 
$67.53. 


$4,546.32 

1,987.30 

643.27 

128.00 

103.50 

$7,408.39 

$  880.60 

128.70 

1,009.30 

$8,417.69 

Copyright,  1917,  The  Ronald  Press  Company 


r 


1-19-5 

Solution  to  Problem  14 

THE  GROCERS'  COMPANY 

Organized  under  the  laws  of 

THE  STATE  OF  MAINE 

With  an  Authorized  Capital  Stock  of 

$75,000.00 

divided  into  750  Shares,  par  value  $100.00  each. 

(1) 
Unissued  Stock  $75,000.00 

To—Capital  Stock  $75,000.00 

To  record  the  amount  of  Capital  Stock 
authorized. 

(2) 
Real  Estate  6,000.00 

Furniture  and  Fixtures  1,790.00 

Good-will  15,000.00 

Merchandise  6,713.00 

Accounts  Receivable  8,552.00 

Notes  Receivable  9,009.00 

Cash  in  Bank  6,790.24 

Cash  on  Hand  43.76 

To—Smith  &  Williams,  Vendors  53,898.00 
To  record  purchase  of  assets  of  Smith  &  Wil- 
liams, per  bill  of  sale  dated 

See  resolution  of  Board  of  Directors, 
recorded  in  their  minute  book,  page. ••• 

(3) 

Smith  &  Williams,  Vendors  3,898.00 

To — Notes  Payable  2,000.00 

Accounts  Payable  1,898.00 

To  record  assumption  of  liabilities  of  Smith 
&  Williams. 

(4) 
Smith  k   Williams,  Vendors  50,000.00 

To — Unissued  Capital  Stock  50,000.00 

To  record  payment  in  full  for  net  assets 
acquired  from  Smith  &  Williams,  per  bill  of 
sale  dated 


Copyright,  1917,  The  Ronald  Press  Company 


ANSWERS  TO  QUESTIONS 


Answer  to  Question  62 — 


1-19-6 


-January  1,  1917- 
Subscriptions  $100,000.00 

To — Capital  Stock 
To  record  subscriptions  to  authorized 
capital  stock  as  follows: 


$100,000.00 


James  Brown 
William  Harper 
Charles  Edwards 


500  shares 
250    " 
250    " 


1,000 


-March  1,  1917- 
Cash 

To — Subscriptions 
To  record  payment  in  full. 


100,000.00 


100,000.00 


Answer  to  Question  63~ 


- January  1,  1917- 
Unsubscribed  Stock 
Subscriptions 

To — Capital  Stock 
To  record  subscriptions  to  authorized 
capital  stock  as  follows: 


$  25,000.00 
75,000.00 


$100,000.00 


James  Brown 
William  Harper 
Charles  Edwards 


250  shares 
250    " 
250    " 


750 


-March  1,  1917- 
Cash 

To — Subscriptions 
To  record  payment  in  full. 


75,000.00 


75,000.00 


Answer  to  Question  64 — Entry  at  January  1  would  be  the  same.   The  entry  at 
March  1,  1917,  would  be  as  follows: 


Cash 

To — Subscriptions 
50%  paid  in. 


$37,500.00 


$37,500.00 


Copyright,  1917,  The  Ronald  Press  Company 


Answer  to  Question  65— 


1-19-7 


f 


-March  2,  1917- 
Donated  Stock  $9,000.00 

To — Capital  Surplus  $9,000.00 

The  following  donations  of  capital  stock 
are  made  for  the  purpose  of  raising  working 
capital ;  see  action  of  Board  of  Directors 
as  recorded  in  their  minutes,  page 

James  Brown  30  shares,  par  value  of  |3,000.00 
William  Harper  30  "  «  ■  «  3,000.00 
Chas.  Edwards  30    "     "    "    "3,000.00 


Total      90    •     •    ■    ■  $9,000.00 


-March  15,  1917- 
Cash  8,100.00 

Capital  Surplus  900.00 

To — Donated  Stock  9,000.00 

The  shares  contributed  by  James  Brown, 
William  Harper,  and  Chas.  Edwards  are 
disposed  of  at  $90  per  share. 

Answer  to  Question  66 — The  capital  of  a  sole  proprietorship  or  partnership 
consists  of  the  original  investment  plus  the  portion  of  profits  not  withdrawn 
from  the  business  and  is  represented  by  the  capital  accounts  kept.   That  is, 
the  capital  of  a  partnership  on  a  certain  date  is  the  sum  of  its  capital  ac- 
counts on  that  date.   In  a  corporation,  however,  the  profits  are  kept  separate 
from  the  capital  invested,  the  profits  being  put  in  a  Surplus  account.   Ordi- 
narily, therefore,  the  capital  of  a  corporation  is  the  sum  of  its  Capital 
Stock  account  and  Surplus  account.  But  it  will  be  shown  later  that  the  capi- 
tal contributed  by  the  owners  of  a  corporation  need  not  always  be  expressed  by 
the  Capital  Stock  account  (e.g.,  donated  stock  creates  a  "capital  surplus" 
which  is  part  of  the  contributed  capital),  nor  may  the  profits  remain  in  the 
Surplus  accouatf 


Copyright,  1917,  The  Ronald  Press  Company 


1-19-8 
RECORDS  OF  A  MANUFACTURING  BUSINESS 

ASCERTAINING  THE  COST  OF  GOODS  SOLD— In  a  trading  concern  there  is  but  one 
element  in  the  cost  of  goods  sold:  the  purchase  price,  to  which  is  added 
freight-in  and  other  expenses  of  bringing  the  goods  to  the  warehouse.   In  a 
manufacturing  business  the  following  elements  should  be  set  out: 

1.  RAW  MATERIAL  is  the  material  which  must  pass  through  manufacturing 
processes  that  alter  its  original  condition  before  it  is  ready  for  sale  as  a 
finished  product.   Its  cost  is  the  invoice  price  to  which  is  added  freight, 
cartage,  and  other  costs  necessary  to  lay  the  same  down  in  the  factory.  Where 
an  adequate  cost  system  is  provided,  a  perpetual  inventory  (see  below)  of  raw 
materials  is  kept,  controlled  usually  by  a  ledger  account.   That  part  of 
materials  used  which  can  be  allocated  to  some  particular  job  or  process  is 
referred  to  as  "direct  material" ;  the  balance  may  be  referred  to  as  indirect 
material. 

2.  LABOR  is  divided  into  direct  (productive)  and  indirect  (non-productive) 
labor.  Direct  labor  can  be  allocated  to  some  particular  job  or  process,  while 
indirect  labor,  such  as  foremen,  repair-men,  timekeepers,  watchmen,  etc.,  can- 
not be  distributed  except  over  the  operations  as  a  whole. 

3.  INDIRECT  FACTORY  EXPENSES,  BURDEN,  or  FACTORY  OVERHEAD  include  all 
other  expenses  of  factory  operation  outside  of  direct  material  and  direct 
labor  charges,  such  as  indirect  material,  indirect  labor,  supplies,  rent, 
taxes,  insurance,  depreciation,  repairs  and  maintenance,  heat,  light,  power, 
etc.   Some  kinds  of  indirect  expense  can  be  allocated  directly  to  a  certain 
product  or  process,  while  others  must  be  distributed  over  the  product  as  a 
whole.   The  correct  allocation  of  indirect  expenses  forms  one  of  the  most 
difficult  problems  in  cost  accounting. 

The  first  two  items  compose  what  is  called  "prime  cost,"  while  the  sum  of 
all  three  items  is  termed  "factory  cost."  Factory  cost  is  the  basis  of  de- 
termining the  valuation  of  inventories  and  cost  of  goods  sold. 

General  and  administrative  expenses  and  selling  expenses  should  not  be 
confused  with  burden  or  factory  overhead;  they  correspond  to  a  similar  classi- 
fication in  a  trading  business  (see  1-14-6)  and  do  not  enter  into  the  cost  of 
finished  stock  sold  or  on  hand. 

INVENTORY  ACCOUNTS  KEPT 
A  manufacturing  business  which  keeps  an  adequate  record  of  its  costs  main- 
tains three  inventory  accounts:  (1)  Raw  Materials,  (2)  Work  in  Process,  and 
(3)  Finished  Stock.   These  accounts  may  appear  in  the  "factory"  ledger  de- 
scribed below,  or  in  the  general  ledger, 

RAW  MATERIALS  ACCOUNT 
DEBIT   .  CREDIT 

With  balance  at  beginning  of  period.   With  goods  returned. 
With  cost  of  purchases.  At  the  end  of  period  with  totals  of 

With  freight-  and  cartage-inward.       materials  issued  to  operating  de- 
With  handling  and  storage  costs.        partments,  at  the  same  time  debit- 
ing Work  in  Process  account,  the 
posting  coming  from  a  requisitions, 
j  ournal . 

Copyright,  1917,  The  Ronald  Press  Company 


1-19-9 
The  balance  of  the  account  will  be  a  debit  and  represents  the  cost  of  raw 
materials  on  hand  and  not  in  process  and  should  agree  with  a  physical  inven- 
tory of  raw  materials  on  hand  as  well  as  the  total  of  the  accounts  carried  in 
a  raw  materials  stores  ledger.   The  latter  record  is  often  a  card  ledger,  a 
card  being  kept  for  each  class  of  raw  materials.   The  card  is  ruled  to  re- 
cord the  receipts  into  stock  and  the  deliveries  from  stock,  and  provides  in 
some  cases  for  the  expression  of  receipts  and  deliveries  in  terms  of  units  of 
measurement,  unit  price  and  cost  price,  in  others  merely  in  terms  of  the  units 
of  measurement. 

WORK  IN  PROCESS  ACCOUNT 
DEBIT  CREDIT 

With  balance  at  beginning  of  period.   With  the  totals  of  the  cost  sheets 

With  totals  of  materials  issued  to       representing  work  completed,  at  the 
operating  departments,  at  the  same     same  time  debiting  Finished  Stock 
time  crediting  Raw  Materials  ac-       account,  the  posting  coming  from  a 
count,  the  posting  being  made  from     finished  stock  journal, 
a  requisitions  journal. 

With  costs  of  direct  labor,  posted 
from  pay-roll  book,  the  contra 
credit  being  to  Wages  Accrued  ac- 
count. 

With  various  items  of  indirect  fac- 
tory expense,  at  the  same  time 
crediting  these  various  expense 
accounts. 

The  balance  of  the  account  will  be  a  debit  and  represents  the  work  in  proc- 
ess at  the  end  of  the  period.  A  total  of  the  cost  sheets  representing  work 
unfinished  should  equal  the  balance  of  this  account,  as  well  as  a  physical  in- 
ventory of  the  unfinished  work. 

FINISHED  STOCK  ACCOUNT 
DEBIT  CREDIT 

With  balance  at  beginning  of  period.   With  the  cost  of  goods  sold  during 
With  totals  of  the  cost  sheets  rep-      the  period,  at  the  same  time  debit- 
resenting  work  finished  during  the     ing  Trading  account  or  Cost  of 
period,  the  posting  coming  from  a      Sales  account,  the  posting  coming 
finished  stock  journal.  from  the  sales  journal  which  con- 

tains a  colxMn  headed  "Cost  of 
Sales." 

The  balance  of  the  account  will  be  a  debit  and  represents  the  cost  of  goods 
manufactured  and  still  on  hand.  This  balance  should  agree  with  a  physical  in- 
ventory of  the  finished  stock,  as  well  as  the  total  of  the  accounts  carried  in 
a  finished  stock  ledger. 

It  should  be  noted  that  these  three  accounts  are  perpetual  inventory  ac- 
counts, the  balances  of  which  should  represent  the  physical  stocks  on  hand 
valued  at  cost.   The  controlling  accounts  are  kept  in  values  only;  the  sub- 
sidiary records  may  be  kept  in  values  only,  or  in  quantities  only,  or  in  both. 


Copyright,  1917,  The  Ronald  Press  Company 


1-19-10 

NATURE  AND  OPERATION  OF  A  FACTORY  LEDGER 

In  the  business  of  the  Miller  Motor  Car  Company,  the  accounts  making  up  a 
factory  ledger  appear  in  the  general  ledger;  this  necessitates  in  a  larger 
business  the  keeping  of  a  subsidiary  ledger  called  an  expense  or  cost  ledger 
which  supports  the  general  ledger  accounts.   An  alternative  method  is  to  in- 
stall a  factory  ledger  which  contains  the  inventory  accounts,  labor  accounts, 
and  factory  overhead  accounts.   A  factory  ledger,  therefore,  separates  the 
"cost"  records  from  the  "financial"  records. 

An  account  in  the  factory  ledger  called  "General  Ledger"  indicates  its  re- 
lation to  the  financial  records,  while  an  account  called  "Factory  Ledger"  is  a 
general  ledger  account  controlling  the  factory  ledger.   Thus,  finished  stock 
sold  to  a  customer  would  call  for  an  entry  in  the  financial  records  as 
follows: 

Customers*  Account  $1,200.00 

To — Sales  $1,200.00 

To  record  sale,  etc. 

A  special  column  in  the  sales  book  would  produce  the  following  entxy  at  the 
end  of  the  month: 

Cost  of  Sales  (or  Trading)  Account  $1,000.00 

To — Factory  Ledger  $1,000.00 

To  record  cost  of  sales,  per  cost  sheets,  etc. 

In  the  cost  records  (i.e.,  a  journal  kept  for  the  factory  ledger)  a  summary 
entry  at  the  end  of  the  month  would  be  made,  using  the  cost  sheets  or  special 
column  in  the  sales  books  as  a  basis: 

General  Ledger  $1,000.00 

To — Finished  Stock  Account  $1,000.00 

To  record  finished  stock  sold,  etc. 

If  for  internal  reasons  it  is  undesirable  to  have  the  costs  disclosed  to 
those  having  access  to  the  sales  books,  the  cost  of  sales  may  be  summarized 
separately. 

REFERENCES : 

Cole,  pages  141-150 

Dickinson,  Chapter  IX 

Esquerre,  pages  173-185 

Nicholson,  "Cost  Accounting,"  pages  24-32,  120-126 


Copyright,  1917,  The  Ronald  Press  Company 


1-20-1 


COMPLETE  ACCOUNTING  COURSE—PART  I 

Lecture  20 

FINANCIAL  STATEMENTS  OF  A  MANUFACTURING  BUSINESS 


Problem  16 

The  following  are  trial  balances  of  the  general  ledger  and  factory  ledger 
of  the  Independence  Manufacturing  Co,  at  June  30,  1917. 


GENERAL 

LEDGER 

TRIAL  BALANCE 

JUNE 

30 

,  1917 

Real  Estate 

$  15,000.00 

Buildings  and  Equipment 

55,000.00 

Accounts  Receivable 

44,500.00 

Notes  Receivable 

6,500.00 

Notes  Receivable  Discounted 

$ 

5,000.00 

Cash 

18,100.00 

Prepaid  Interest 

300.00 

Unexpired  Insurance 

580.00 

Capital  Stock 

75,000.00 

Surplus — Balance,  May  31,  1917 

42,310.00 

Bank  Loans 

10,000.00 

Accounts  Payable 

15,800.00 

Taxes  Accrued 

1,400.00 

Factory  Ledger 

62,150.00 

Sales 

56,000.00 

Discounts  on  Purchases 

. 

130.00 

Discounts  on  Sales 

100.00 

Office  Salaries 

1,570.00 

General  Expense 

800.00 

Salesmen's  Salaries  and  Expense 

950.00 

Sales  Office  Salaries  and  Expense 

1 

740.00 

Interest  Received 

650.00 

$206,290.00 

$206,290.00 

Copyright.  1917,  The  Ronald  Press  Company 


b 


1-20-2 


FACTORY  LEDGER  TRIAL  BALANCE 
JUNE  30,  1917 


General  Ledger  $61,800.00 

Raw  Materials  Account  (including  opening  inventory 

and  purchases)  $40,400.00 

Work  in  Process  (Inventory,  May  31,  1917)  4,100.00 

Finished  Stock  (Inventory,  May  31,  1917)  5,800.00 

Factory  Supplies  800.00 

Direct  Labor  8,550.00 

Superintendence  650.00 

Heat,  Light,  and  Power  (including  fuel)  1,280.00 

Miscellaneous  Factory  Expenses  220.00 


$61,800.00   $61,800.00 


Adjusting  journal  entries  have  been  made  in  the  general  journal  and  posted 
to  the  general  ledger,  before  the  above  trial  balance  was  taken,  as  follows: 

Factory  Ledger  Account  $250.00 

General  Expense  50.00 

To — Taxes  Accrued  $300.00 

To  take  up  taxes  accruing  during  June. 

Factory  Ledger  Account  100.00 

To — Unexpired  Insursince  100.00 

Insurance  expired  in  June,  per  insurance  register. 

No  corresponding  entries  have  been  made  on  the  factory  journal  as  yet. 

Materials  issued  during  the  month  are  shown  by  the  requisitions  journal  to 
amount  to  $38,200.   The  cost  of  sales  for  the  month  appears  in  the  sales  book 
as  $50,100.   The  total  of  cost  sheets  representing  stock  completed  in  the 
month  of  June  is  $48,500.   Coal  on  hand  amounts  to  $400.   Office  salaries  un- 
paid $230.  Prepaid  interest  expired  $200, 

From  the  above  information  prepare: 

(a)  Entries  necessary  to  close  both  the  factory  ledger  and  general 

ledger  at  June  30,  1917. 

(b)  A  balance  sheet  at  June  30,  1917, 

(c)  A  statement  of  profits  and  income  for  the  month  ending  June  30, 

1917. 
•(d)  A  statement  of  cost  of  sales  during  the  same  period. 


Copyright,  1917,  The  Ronald  Press  Company 


WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 
SUMMARY  OF  TRANSACTIONS 


1-20-3 


MAY  22 


Collection  report  for  last  week: 


t 

DISCOUNT 

DISTRICT 

CASH 

ALLOWED 

#1 

$  1,233.75 

$  20.73 

2 

3,350.28 

51.47 

3 

1,908.17 

15.25 

4 

2,602.23 

43.33 

5 

3,267.75 

47.29 

7 

964.64 

8.13 

$13,326.82 

$186.20 

TOTAL  CASH 

CREDITS  TO 

CUSTOMERS 

$  1,254.48 

3,401.75 

1,923.42 

2,645.56 

3,315.04 

972.77 

$13,513.02 


NOTES  RECEIVED 

ON. ACCOUNT 

$  2,000.00 

5,900.00 

900.00 

2,500.00 

5,000.00 

2,200c00 

$18,500.00 


The  bank  notifies  us  that  the  30-day  draft  drawn  on  Frank  Rice  April  21 
has  been  paid  by  him  and  credited  to  our  account. 

The  board  of  directors  issued  Call  No.  2  for  60%  of  the  common  stock,  pay- 
able in  cash  May  22.  Received  in  response  thereto: 


P.  J.  Kirkwood 
S,  K.  Stevenson 
Fred  Higgins 
Frank  Holloway 


$  6,000.00 
6,000.00 
9,000.00 
9,000.00 

$30,000.00 


Pay  the  New  York  Auto  Supply  Co.,  the  balance  of  their  account,  $29,500. 

Pay:    B.  F.  Goodrich  Co.  $5,640.00  less  2% 

Standard  Wheel  Co.  2,099.50   "   2% 

Stahl  Steel  Works  1,787,00   "   1% 

Williams  and  Richards  356.25 

MAY  23 
Shipment  of  tires  received  from  B.  F.  Goodrich  Co.,  $928.75,  2%  10  days, 
net  30  days.  Received  the  balance  of  our  contract  with  the  Automobile  Acces- 
sories Manufacturing  Co.,  $318.75,  2%  15  days,  net  30  days.   Standard  Wheel 
Co.  $1,972.70,  2%  10  days,  net  30  days. 

MAY  24 

Buy  of  Williams  and  Richards  shop  supplies  $487.50,  terms  2%  5  days,  net 
30  days.   Invoice  of  Western  Printing  Co.,  for  advertising  $38.29;  stationery 
and  printing  $422.80;  shop  forms  $165.75;  total  $626.84  net  30  days. 

MAY  25 

Receipt  of  the  following  shipments  is  reported: 


Best  Drop  Forge  Works,  Raw  Material 
Briscoe  Radiator  Co. ,  New  Style  Radi- 
ators 


$1,982.50  terms  2}^   5  days,  net  30  days 


2,750.00  July  1 
Copyright,  1917,  The  Ronald  Press  Company 


1-20-4 


MAY  26 
District  managers'  sales  reports: 


DISTRICT 

CARS 

#1 

$11,300.00 

2 

5,000.00 

3 

9,875.00 

4 

16,350.00 

5 

5,495.00 

7 

8,900.00 

8 

4,875.00 

$61,795.00 

?ay  Star  Auto  Co.  $1,580.00. 

Pay-roll  for  week: 
Factory: 

Direct  Labor 

Indirect  Labor 

Repairs — Plant  and  Equipment 

Heat,  Light,  and  Power 
Office: 

Salesmen's  Salaries 

Office  Salaries 


MAY  28 


FINISHED  PARTS 

$   946.37 

1,059.25 

873.60 

1,500.43 

1,983.65 

387.00 

625.42 


,375.72 


$5,673.25 

2,028.13 

723.87 

207.30 

$1,028.35 
175.50 


?8,632.55 

1,203.85 
?9,836.40 


Pay  freight  bills  for  week  to  Penn.  R.  R.  Co.  on  finished  parts  $181.35, 
Pay  Automobile  Accessories  Manufacturing  Co.,  invoice  of  May  12. 


MAY  29 


Collection  report  for  past  week: 


TOTAL  CASH 

DISCOUNT 

CREDITS  TO 

NOTES  RECEIVED 

DISTRICT 

'cash 

ALLOWED 

CUSTOMERS 

ON  ACCOUNT 

#1 

$4,273.21 

$  83.27 

$4,356.48 

$5,000.00 

2 

3,542.80 

60.92 

3,603.72 

1,500.00 

3 

2,473.29 

43.38 

2,516.67 

1,875.00 

4 

7,029.73 

103.75 

7,133.48 

2,900.00 

5 

4,900.33 

92.28 

4,992.61 

3,000.00 

7 

4,387.00 

89.50 

4,476.50 

3,500.00 

8 

819.96 

33.15 

853.11 

2,100.00 

$27,426.32 

$506.25 

$27,932.57 

$19,875.00 

Pay:    B.  F.  Goodrich  Co.  Invoice  of  May  18 

Williams  and  Richards  "        24 

The  U.  S.  Advertising  Company  presented  their  bill  for  $30,738  for  May 
advertising  under  contract  dated  May  10,  terms  15  days.   Finished  parts 
amounting  to  $20,000  were  purchased  from  the  Crown  Automobile  Company,  terms 
July  1. 

Copyright,  1917,  The  Ronald  Press  Company 


1-20-5 


MAY  31 


Accrued  pay-roll  to  date: 

Factory: 

Direct  Labor 

Indirect  Labor 

Repairs — Plant  and  Equipment 

Heat,  Light,  and  Power 

Office: 

Salesmen's  Salaries 

Office  Salaries 

Officers*  Salaries  (month) 


District  managers*  sales  reports  to  May  31 


$3,548.72 
1,085.43 
263.21 
110.05  $5,007.41 


$  652.50 
122.00 
1,800.00   2,574.50 


$7,581.91 


DISTRICT 

CARS 

FINISHED  PARTS 

#1 

$7,000.00 

$  475.00 

2 

321.43 

3 

2,100.00 

93.47 

4 

2,775.00 

1.637.28 

5 

1,875.00 

191.40 

7 

3,750.00 

926.42 

8 

3,500.00 

287.00 

$21,000.00 


$3,932.00 


Petty  cash  disbursements  to  date,  $220.83,  are  as  follows:  prepaid  freight 
on  cars  sold  $103.50;  extra  help  unloading  coal  $46.50;  sundry  manufacturing 
expenses  $13.23;  local  advertising  $23.75;  maintenance  of  delivery  equipment 
$10.48;  miscellaneous  general  expenses  $23.37.   The  petty  cashier  is  reim- 
bursed for  the  total. 


Collection  report  for  the  last  three  days: 

TOTAL  CASH  NOTES 

DISCOUNT  CREDITS  TO  RECEIVED 

DISTRICT     CASH     ALLOWED   CUSTOMERS  ON  ACCOUNT 

#1     I  345.25  $  5.23    $  350.48   $ 

2  1,733.22    22.92     1,756.14    

3  1,422.92    19.88     1,442.80    

4  1,433.47    25.43     1.458.90    

5  963.82    17.27       981.09    

7  1.049.29    18.68     1,067.97    

8  854.78    13.22       868.00  1,000.00 

17.802.75  $122.63    $7,925.38  $1,000.00 


Copyright,  1917,  The  Ronald  Press  Company 


Solution  to  Assignment  1-18-2 


1-20-6 


MILLER  MOTOR  CAR  CO. 
BALANCE  SHEET,  MAY  1,  19— 
ASSETS 
CAPITAL  ASSETS: 

Warehouse  and  Office  Fixtures        $  1,450.00 
Delivery  Equipment 


Good-will 

SUBSCRIPTIONS: 

7%   Preferred  Stock 
Common  Stock 

CURRENT  ASSETS: 
Inventories: 

Automobiles 
Finished  Parts 
Miscellaneous  Supplies 
Consignment  Stock  Outward 
Advances  on  Consignments-Inward 

Customers'  Accounts 

Notes  Receivable 

Less — Notes  Receivable  Discounted 

Cash  in  Bank 
Petty  Cash  Fund 


PREPAID  EXPENSES: 

Unexpired  Insurance 
Rent  Paid  in  Advance 


1,750.00 

$  3,200.00 
66,000.00 

$  69,200.00 

$50,000.00 
50,000.00 

100,000.00 

$30,000.00 

5,890.00 

300.00 

3,200.00 

1,100.00 

$  40,490.00 

35,542.00 

100.00 

3,734.00 

$10,100.00 
10,000.00 

$  3,634.00 
100.00 

79,866.00 

$     50.00 
200.00 

250.00 

$249,316.00 

LIABILITIES 


CAPITAL  STOCK: 

7%  Preferred  Stock 
Common  Stock 

CURRENT  LIABILITIES: 
Bank  Loan 
Audited  Vouchers 
Notes  Payable 

Interest  Accrued  on  Notes  Payable 
Taxes  Accrued 


$100,000.00 
100,000.00  $200,000.00 


$  3,000.00 

36,080.00 

10,000.00 

36.00 

200.00 


49,316.00 
$249,316.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-20-7 


Solution  to  Problem  15 


(1) 


Unissued  First  Mortgage  5%  Bonds  $150,000.00 

To — First  Mortgage  5%  Bonds  Authorized 
To  record  authorized  issue  of  bonds  ;  see 

minutes  of  Board,  page ,  and  of 

stockholders,  page 

(2). 
Cash  150,000.00 

To — Unissued  First  Mortgage  5%  Bonds 
Issue  of  bonds  disposed  of  at  par. 


150,000.00 


150,000.00 


JOHNSON  SHOE  CO. 
BALANCE  SHEET,  DECEMBER  31,  1917 


ASSETS 
CAPITAL  ASSETS: 
Plant  and  Equip- 
ment $300,000 
Good-will  50,000  $350,000 


PROCEEDS  FROM  SALE  OF  FIRST 
MORTGAGE  5%  BONDS,  on 
December  31,  1917 


150,000 


LIABILITIES 
CAPITAL  STOCK: 

Authorized  $250,000 

Deduct — 

Unissued        $  15,000 
Purchased        10,000   25,000 


Total  Issued  and  Out- 
standing 


$225,000 


CURRENT  ASSETS: 

Inventories  of — 

Raw  Materials 

$25,000 

Unfinished  Goods 

3,000 

Finished  Stock 

12,000 

Total 

$40,000 

Accounts  Receivable 

44,000 

Cash 

10,000 

PREPAID  EXPENSE: 

Inventory  of  Stationery  and 
Supplies 


FIRST  MORTGAGE  5%  BONDS: 
Issued  and  Outstanding 

DEBTS  PAYABLE  FROM  PROCEEDS  OF 
SALE  OF  FIRST  MORTGAGE  5% 
BONDS  (per  contra) 

Mortgage  on  Plant  $100,000 


Bank  Loans 
94,000 

CURRENT  LIABILITIES: 

Accounts  Payable 
SURPLUS : 
1,000   Balance,  Jan. 
1,  1917 
Profits  for  year 


$595,000 


$  20,000 
10,000 


150,000 


50,000  150,000 


40,000 


30,000 
$595,000 


ANSWERS  TO  QUESTIONS 

Answer  to  Question  67— The  bonds  are  to  run  for  forty  years  from  the  date 
of  issue;  they  are  convertible  into  some  other  security  of  the  corporation, 
probably  stock,  within  the  limits  specified  on  the  bond;  they  are  to  bear 
interest  at  the  rate  of  5%  per  annum;  redemption  is  to  be  made  in  gold  coin  if 
demanded  by  the  owner;  the  bond  is  coupon  in  form,  that  is,  interest  warrants 
are  attached  to  the  bond  and  are  to  be  removed  as  they  become  due. 


Copyright,  1917,  The  Ronald  Press  Company 


1-20-8 
Answer  to  Question  68 — 

(a)  In  this  case  the  discount  column  usually  appears  in  the  cash  book, 
since  the  method  is  used  most  frequently  where  not  all  cash  discounts  are 
taken  advantage  of.   Whether  or  not  the  column  appears  in  the  cash  book  or  in 
the  voucher  register,  its  total  will  be  posted  (1)  to  the  debit  of  Vouchers 
Payable  account  and  (2)  to  the  credit  of  Discounts  on  Purchases  account. 

VOUCHERS  PAYABLE  ACCOUNT 

DEBITS:  CREDITS: 

Total  of  vouchers  payable  column  in  Total  of  amount  column  in  voucher 

cash  disbursements  book.  register  . 

Total  of  discount  column  in  voucher  Miscellaneous  journal  credits. 

register. 
Miscellaneous  journal  debits. 

(b)  This  case  differs  from  (a)  in  that  the  total  of  the  cash  discount  col- 
umn is  not  posted  to  the  Vouchers  Payable  account,  being  posted  to  the  credit 
of  Discounts  on  Purchases  account  only. 

Answer  to  Question  69 — The  voucher  register  performs  the  function  of  a 
book  of  original  entry,  since  it  is  the  record  in  which  the  transactions  are 
entered  at  the  time  they  occur  and  it  contains  a  record  of  equal  debits  and 
credits  which  are  posted  to  the  ledger.   It  is  also  a  book  of  final  entry,  in 
that  dates  or  numbers  of  checks  paying  the  vouchers  are  transferred  to  a 
special  column  of  the  register ;  the  register  is  thus  equivalent  to  a  sub- 
sidiary ledger,  for  the  total  of  the  "open"  items  should  equal  the  balance  of 
the  Vouchers  Payable  controlling  account. 

Answer  to  Question  70—  (a) 

Raw  Materials  $15,000.00 

Finished  Parts  10,000.00 

Productive  Labor  28,000.00 

To — Vouchers  Payable  $52,000.00 

Discounts  on  Purchases  1,000.00 

Totals  of  voucher  register  posted  at  end  of 
month;  all  items  will  be  posted  in  total 
except  the  miscellaneous  column  at  the  ex- 
treme right  the  details  of  which  will  be 
posted  individually  to  the  general  ledger. 

Raw  Materials  ^  ^  15,000.00 

Finished  Parts  10,000.00 

Productive  Labor  28,000.00 

To — Vouchers  Payable  32,000.00 

Accounts  Payable  20,000.00 

Discounts  on  Purchases  1,000.00 

•Totals  of  voucher  register  posted  at  end  of 
month;  all  items  will  be  posted  in  total 
with  the  exception  of  the  general  ledger 
column  as  in  (a)  and  with  the  exception  of 
the  Accounts  Payable  which,  besides  being 
posted  in  total,  will  be  posted  as  to  the 
individual  items  appearing  therein  to  the 
accounts  payable  ledger. 

Copyright,  1917,  The  Ronald  Press  Company 


1-20-9 


FINANCIAL  STATEMENTS  OF  A  MANUFACTURING  BUSINESS 


The  balance  sheet  and  statement  of  profit  and  loss  prepared  by  a  manufac- 
turing business  do  not  differ  from  those  of  a  trading  business  except  in  the 
fact  that  the  cost  of  sales  is  made  up  of  the  three  elements  indicated  in 
1-19-8.   The  merchandise  purchased  by  a  trading  business  is  in  a  finished 
state  ready  for  sale,  while  that  purchased  by  a  manufacturing  business  is  raw 
material  to  which  various  costs  must  be  added  before  ready  for  sale.   The  ob- 
ject of  a  cost  of  sales  statement  in  a  trading  business  is  to  show  the  cost 
of  that  portion  of  the  purchases  which  has  been  sold;  in  a  manufacturing  busi- 
ness its  object  is  to  show  the  cost  of  that  part  of  the  goods  manufactured 
which  has  been  sold.   It  is  also  desirable  to  show  a  statement  of  the  cost  of 
manufacture,  whether  the  finished  or  partly  finished  goods  have  been  sold  or 
not.   The  two  statements  are  frequently  combined  (see  illustration  below)  into 
a  tabular  statement  entitled  "Statement  of  Cost  of  Manufacture  and  Sales." 
The  statements  of  the  cost  of  manufacture  and  of  sales  are  valuable  chiefly  to 
the  manager  of  a  manufacturing  enterprise,  in  that  comparative  costs  and  rela- 
tive efficiency  of  various  departments  can  be  obtained.   If  percentages  are 
used  in  these  statements.  Net  Sales  is  usually  taken  as  the  basis. 

As  in  the  case  of  the  statement  of  profit  and  loss,  the  statement  of  cost 
of  manufacture  may  be  prepared  in  two  ways,  the  one  followed  depending  on  the 
preference  of  the  accountant.  The  first  may  be  called  the  "account"  form  and 
the  second  the  "report"  or  "statement"  form. 

ACCOUNT  FORM  OF  MANUFACTURING  STATEMENT — The  account  form  is  essentially  a 
replica  of  the  ledger  "Manufacturing  Account,"  if  one  is  kept,  and  usually 
appears  in  connection  with  the  "Manufacturing,  Trading,  and  Profit  and  Loss 
Account,"  illustrated  by  the  following: 

ERDMAN  MANUFACTURING  CO. 

STATEMENT  OF  MANUFACTURING,  TRADING,  AND  PROFIT  AND  LOSS 

YEAR  ENDING  DECEMBER  31,  1917 

MANUFACTURING  ACCOUNT 


Inventory  of  Raw  Materials, 

Jan.  1,  1917  $10,122.15 

Inventory  of  Partly  Finished 


Goods,  Jan.  1,  1917 

3,672.01 

Purchases  of  Raw  Materials 

68,090.58 

Freight  on  Purchases 

3,111.32 

Wages 

8,111.03 

Power,  Light,  and  Heat 

1,100.50 

Miscellaneous  Factory  Ex- 

penses 

3,400.03 

Depreciation 

999.00 

Insurance 

300.00 

Taxes 

250.00 

Inventory  of  Raw  Materials, 

Dec.  31,  1917  (  7,047.67 

Inventory  of  Partly 

Finished  Goods,  Dec.  31, 

1917  5,879.22 

Cost  of  Finished  Goods 

Manufactured,  carried 

down  to  Trading  Account   86,229.73 


$99, 156.62 


^^99, 156.62 


Copyright,  1917,  The  Ronald  Press  Company 


TRADING  ACCOUNT 


1-20-10 


Cost  of  Finished  Goods  Manu- 
factured brought  down     $86,229.73 

Inventory  of  Finished 

Goods,  Jan.  1,  1917         5,238.11 

Freight  Allowances  on  Sales   2,925.09 

Gross  Profit  carried  down  to 

Profit  and  Loss  Account    28,815.99 


$123,208.92 


Inventory  of  Finished 
Goods  Dec.  31,  1917 
Sales 


i  3,176.89 
120,032.03 


$123,208.92 


PROFIT  AND  LOSS  ACCOUNT 


Salesmen's  Traveling  Ex- 
penses $  1,425.50 
Advertising  1,783.03 
Office  Rent  700.00 
Office  Salaries  4,004.50 
Sundry  Office  Expenses  1,103.92 
Bad  Debts  854.83 
Discount  on  Sales  2,100.75 
Net  Profit  transferred  to 

Surplus  18,586.86 

$30,559.39 


Gross  Profit  carried  down 
from  Trading  Account 

Interest  on  Bills  Re- 
ceivable 

Discount  on  Purchases 


$28,815.99 

442.37 
1,301.03 


$30,559.39 


If  several  products  are  made  in  the  same  factory,  a  manufacturing  account 
may  appear  for  each,  or  they  may  be  shown  in  the  same  account  by  the  use  of  a 
columnar  ledger  page.   The  form  of  the  manufacturing  account  shown  above  may 
also  be  rearranged  to  bring  out  separately,  (1)  the  cost  of  raw  materials  used 
(providing  the  inventory  of  raw  materials  is  separable  from  the  inventory  of 
partly  finished  and  finished  goods);  (2)  the  direct  labor  cost;  and  (3)  the 
factory  overhead. 

REPORT  FORM  OF  MANUFACTURING  STATEMENT — The  following  points  are  clearly 
indicated  by  the  report  form  shown  below:  (1)  the  cost  of  manufacture  for  the 
period,  subdivided  into  (a)  material,  (b)  labor,  and  (c)  factory  overhead 
cost;  (2)  the  cost  of  finished  product  manufactured;  and  (3)  the  cost  of 
finished  product  sold.   The  last-named  may  be  set  out  in  a  separate  statement 
if  desirable. 


Copyright,  1917,  The  Ronald  Press  Company 


1-20-11 

ERDMAN  MANUFACTURING  CO. 

STATEMENT  OF  COST  OF  MANUFACTURE  AND  OF  SALES 

YEAR  ENDING  DECEMBER  31,  1917 

MATERIALS: 

Inventory  of  Raw  Materials,  January 

1,  1917  $10,122.15 

Purchases  $68,090.58 

Freight-In  3,111.32   71,201.90 


TOTAL  RAW  MATERIALS  COST  $81,324.05 

Inventory  of  Raw  Materials,  December 

31,  1917  7,047.67  $74,276.38 


DIRECT  LABOR  8,111.03 

FACTORY  OVERHEAD: 

Power,  Heat,  and  Light  $  1,100.50 

Depreciation  999.00 

Insurance  300.00 

Taxes  250.00 

Miscellaneous  Factory  Expenses  3,400.03    6,049.53 


TOTAL  MANUFACTURING  COST  $88,436.94 

DEDUCT — Increase  in  Inventory  of  Partly  Finished  Goods — 

December  31,  1917  $  5,879.22 

January  1,  1917  3,672.01    2,207.21 


COST  OF  FINISHED  GOODS  MANUFACTURED  $86,229.73 

ADD — Decrease  in  Inventory  Finished  Goods — 

January  1,1917  $  5,238.11 

December  31,1917  3,176.89    2,061.22 


COST  OF  FINISHED  GOODS  SOLD  $88,290.95 


REFERENCES : 

Esquerre,  pages  430-446 

Gilman,  Chapter  VII 

Greendlinger  and  Schulze,  pages  335-355 


Copyright,  1917,  The  Ronald  Press  Company 


1-21-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  21 

RESERVES 


WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

MAY  31 
Adjusting  entries  should  be  made  in  the  journal  for: 

fa)  Depreciation  at  the  following  rate  (per  annum);  buildings  2%; 

machinery  10%;  office  and  warehouse  fixtures  6%;  delivery  equip- 
ment 15%. 

(b)  Reserve  for  bad  debts,  }4%  of  gross  sales. 

(c)  Additional  taxes  accrued  ^247.67, 

(d)  Insurance  expired  ^76.67. 

(e)  Rent  expired  $50  (charge  Miscellaneous  Selling  Expenses). 

(f)  Miscellaneous  supplies  consumed  (consisting  of  stationery)  |100. 

(g)  Interest  accrued  on  notes  payable  and  bonds. 

The  cost  of  raw  materials  used  in  production  during  the  month,  according 
to  total  requisitions  issued,  is  $8,754.78. 

All  the  finished  parts  are  purchased,  and  the  summary  of  parts  issued 
shows  that  for  May  a  total  of  $55,101.55  has  been  used  in  production,  while  a 
total  of  $14,953.18  has  been  sold,  leaving  a  balance  of  $3,724.08  on  hand. 

Work  in  progress  transferred  to  finished  stock  during  the  month  as  per 
cost  sheets  amounts  to  $96,232.21. 

The  automobiles  on  hand  May  1  and  the  consignment  returned  have  been  sold 
during  the  month,  as  well  as  part  of  the  finished  stock  of  automobiles  manu- 
factured amounting  to  $88,013.96,  leaving  a  balance,  agreeing  with  the  cost 
sheets,  of  $8,218.25. 

ANSWERS  TO  QUESTIONS 

Answer  to  Question  71 — Part  of  the  freight-inward,  if  prepaid,  will  have 
been  included  in  the  sales  price  of  the  materials  purchased  or  added  to  the 
sales  price  on  the  invoice,  and  it  is  usually  not  possible  or  practicable  to 
separate  the  two  elements.   Hence  freight,  when  paid  by  the  buyer  of  the 
goods,  is  often  debited  directly  to  the  purchase  accounts. 

Answer  to  Question  72— The  second  of  three  methods  is  one  which  should  be 
followed,  since  this  represents  cost.   The  first  does  not  take  up  all  of  the 
actual  cost  and  leaves  an  amount  of  burden  to  be  absorbed  in  the  cost  of  other 
products  manufactured,  a  procedure  obviously  unfair.  The  third  method,  provid- 
ing the  market  price  exceeds  the  cost  under  (b),  will  include  in  the  valuation 
of  the  machines  a  profit  which  is  not  earned  ;  moreover  the  purpose  of  the 
business  in  building  the  machines  was  to  effect  a  saving,  else  it  would  have 
been  a  better  bargain  to  purchase  them.   This  saving  is  reflected  by  a  lower 
depreciation  charge  during  the  life  of  the  machines. 

Copyright,  1917,  The  Ronald  Press  Company 


1-21-2 
Answer  to  Question  75 — Land  is  continually  appreciating  in  value  nearly 
everywhere,  but  this  fact  is  not  enough  to  warrant  taking  up  such  increase  on 
the  books.   It  is  usually  considered  that  the  contra  credit  to  the  increase  in 
land  valuations  is  not  a  realized  profit  and  would  appear  on  the  books  only 
when  realized,  i.e.,  when  the  land  is  sold.   However,  in  the  case  of  a  re- 
valuation of  properties,  it  might  be  desirable  to  give  expression  to  the  in- 
crease of  land  values  on  the  books.   But  the  credit  should  be  made  to  capital 
surplus  rather  than  to  free  surplus,  in  order  that  unrealized  profits  may  not 
be  distributed  through  payment  of  cash  dividends  therefrom. 

RESERVES 

A  reserve  is  an  account  appearing  on  the  balance  sheet  representing: 

1.  A  valuation  account  ; 

2.  An  appropriation  of  profits  for  a  special  purpose,  called  a  "true 

reserve"  ;  or 

3.  A  combination  of  the  foregoing, 

1.  A  valuation  account,  that  is,  an  amount  offsetting  an  asset  which  has 
declined  in  value,  is  illustrated  by  a  reserve  for  depreciation,  description 
of  which  appears  below.   It  is  created  by  a  debit  to  operating  expenses,  and 
on  the  balance  sheet  is  deducted  from  the  asset  it  offsets.   Similar  reserves 
are  provided,  where  necessary,  for  other  assets  such  as  inventories  and  ac- 
counts receivable. 

2.  "True"  reserves  are  so  called  because  their  effect  is  to  "reserve" 
profits  from  ordinary  surplus  available  for  dividends.   Illustrations  are 
found  in  reserves  for  contingencies,  sinking  fiind  reserves,  etc.   They  are 
also  termed  appropriated  surplus  since  they  are  created  out  of  profits  and  in 
reality  are  a  part  of  the  surplus  whether  shown  as  such  on  the  balance  sheet 
or  not. 

3.  Reserves  for  pensions,  insurance,  accidents,  etc.,  are  usually  created 
by  a  charge  against  operations  (as  in  case  1)  but,  unless  an  actual  liability, 
are  nearly  equivalent  to  a  division  of  surplus  (as  in  case  2). 

DEPRECIATION 

NATURE  OF — A  distinction  between  capital  and  current  assets  has  already 
been  drawn  (See  1-5-2).   This  distinction  is  further  indicated  when  it  is  said 
that  a  capital  asset  performs  many  services  in  a  business  before  its  useful- 
ness is  impaired  or  destroyed,  while  a  current  asset  performs  but  one  service 
and  immediately  loses  its  identity. 

Contrast  the  services  yielded,  for  example,  by  a  machine  whose  life  is 
five  years  and  1,000  tons  of  coal  which  are  expected  to  last  the  same  length 
of  time.   The  cost  was  $3,000  each  for  both  machine  and  coal,  and  each  is  ex- 
pected to  have  a  scrap  or  residual  value  (scrap  iron  in  the  case  of  the 
machine,  and  cinders,  etc.,  in  the  case  of  the  coal)  of,  say,  |200.  Both 
machine  and  coal  yield  services,  the  only  distinction  being  that  the  physical 
dimensions  of  one  remain  the  same ;  those  of  the  other  diminish.   The  VALUE — 
dimensions  of  each  are  decreasing  at  precisely  the  same  rate,  inasmuch  as  each 

Copyright,  1917,  The  Ronald  Press  Company 


1-21-3 

is  contributing  services  or  uses  to  the  business.   No  one  would  deny  that  the 
coal,  as  consumed  in  operations,  is  an  expense  of  those  operations;  hence,  if 
this  is  true,  it  must  follow  that  the  machine,  consumed  in  operations,  is  also 
an  expense  of  operations.   The  decline  in  value  of  a  capital  asset,  such  as  a 
machine,  because  of  use  in  operations  or  for  other  reasons,  is  called  depre- 
ciation. 

KINDS  OF — Depreciation,  or  decline  in  value  of  capital  assets,  may  be  due 
to— 

1.  Physical  causes,  such  as 

(a)  Wear  and  tear  from  use  ; 

(b)  Exposure  to  the  elements,  or  the  working  of  other  "laws  of 

nature"  ;  or 

(c)  Accidental  causes. 

2.  Functional  causes,  such  as 

(a)  Obsolescence  ;  or 

(b)  Inadequacy. 

Another  classification  is  (1)  unit  depreciation  and  (2)  composite  depre- 
ciation, the  former  referring  to  various  capital  asset  units  of  the  business r 
the  latter  to  the  depreciation  of  the  entire. capital  asset  investment  of  the 
business  as  a  whole. 

TREATMENT  IN  TIffi  ACCOUNTS— 

Depreciation  of  Machinery  $  560.00 

To — Reserve  for  Depreciation  of  Machinery  $  560.00 

Provision  for  year  on  machine. 

Since  depreciation  is  £in  expense  of  operations  it  is  treated  similar  to 
any  other  expense:  debited  to  the  operations  benefited;  the- coal  consumed 
would  be  debited  in  the  same  way.   The  other  half  of  the  entry  is  rarely 
posted  to  the  capital  asset  account,  however,  as  it  is  desirable  to  keep  tho 
cost  price  distinct;  in  fact,  the  cost  price  of  a  capital  asset  is  shown  on 
the  balance  sheet  from  period  to  period,  the  depreciation  being  subtracted 
therefrom,  until  the  capital  asset  has  been  disposed  of.   The  reserve  for  de- 
preciation is  thus  seen  to  be  merely  an  offset,  and  nothing  else,  to  an  over- 
stated asset. 

Continuing  the  example  of  the  machine  £ind  assuming  the  foregoing  adjusting 
entry  is  made  at  the  close  of  each  of  the  five  years  of  its  life,  a  reserve  of 
32,800  will  have  accumulated.   If,  then,  the  old  asset  is  discarded,  having  a 
scrap  value  of  $200: 

Reserve  for  Depreciation  $2,800.00 

Scrap  Material  200.00 

To — Machinery  Account  $3,000.00 

Machine  discarded. 

A  new  asset  replacing  the  old  will  be  debited  to  the  capital  asset  account  at 
its  cost  price  in  the  usual  way. 

Copyright,  1917,  The  Ronald  Press  Company 


1-21-4 
A  PLANT  LEDGER  is  kept  by  businesses  having  more  than  a  few  depreciating 
capital  assets;  it  is  commonly  a  card  ledger,  a  card  being  devoted  to  each 
unit  (machine  or  group  of  machines  of  the  same  character).   The  card  is  ruled 
in  such  a  way  that  the  depreciated  value  may  be  determined  at  any  time,  also 
the  depreciation  for  the  current  period.   (See  illustrations  in  citations  be- 
low.)  Space  is  also  provided  for  the  recording  of  functional  depreciation. 
The  plant  ledger  may  be  divided  into  several  sections  such  as  buildings, 
machinery,  fixtures,  tools,  etc.,  each  having  separate  controlling  accounts  in 
the  general  ledger.  Each  section  will  be  controlled  by  two  accounts  ;  thus  the 
details  of  the  machinery  ledger  are  summarized  (1)  in  the  Machinery  account 
and  (2)  in  the  Reserve  for  Depreciation  on  Machinery  account. 

METHODS  OF  PROVIDING  FOR  DEPRECIATION 

Several  methods  of  providing  for  depreciation  are  in  use.   These  methods 
have  arisen  owing  to  the  following  facts:  (1)  the  allowance  for  depreciation 
must  be  an  estimate,  inasmuch  as  the  life  of  an  asset  cannot  be  definitely 
forecasted;  (2)  the  factor  of  obsolescence  or  inadequacy  constantly  lessens 
the  value  of  preceding  estimates ;  (3)  some  machines  require  constantly  in- 
creasing repairs  as  they  age  and  it  is  found  inequitable,  in  such  cases,  to 
equalize  the  cost  of  the  asset  over  its  life,  especially  when  its  produc- 
tivity, as  it  declines  in  value,  is  greatly  reduced. 

1.  STRAIGHT-LINE  METHOD — This  is  the  method  in  most  common  use,  being  the 
simplest  in  theory  and  application.   In  the  above  example  of  a  machine  whose 
life  is  five  years,  a  yearly  charge  of  $560  is  required.  .  This  is  computed  ac- 
cording to  the  formula — 

C  -  S 
D  =  


D  representing  the  yearly  charge  to  operations  and  yearly  increase  of  depreci- 
ation reserve,  C  the  cost  of  the  asset,  S  its  scrap  or  salvage  value,  and  n 
the  number  of  years  the  asset  is  expected  to  last. 

2.  REDUCING  BALANCE  METHOD — The  reducing  balance  method  applies  under  the 
theory  that  the  expense  of  up-keep  is  light  when  an  asset  is  new,  and  heavy 
in  the  final  years  of  its  life.   The  charges  to  operations  on  account  of  the* 
asset  are,  by  use  of  this  method,  more  evenly  distributed.   It  is  also  claimed 
that  this  method  more  accurately  reflects  on  the  books  the  large  composite  de- 
preciation which  takes  place  in  the  case  of  a  new  plant.   The  objection  is 
that  but  few  assets  depreciate  exactly  in  the  manner  indicated.   In  the  fol- 
lowing formula,  P  represents  the  percentage  to  be  deducted  each  year  from  the 
declining  values: 


=  i-"V- 


Copyright,  1917,  The  Ronald  Press  Company 


1-21-5 
This  formula,  applied  to  the  foregoing  illustration,  will  produce  results  as 
follows: 


Cost  new 
First  year 
Second  year 
Third  year 
Fourth  year 
Fifth  year 


YEARLY 
PROVISION 
» 

1,254.81 
729.96 
424.64 
247.03 
143.70 


At  end  of  fifth  year  $2,800.14 


TOTAL 
PROVISION 
$ 

1,254.81 
1,984.77 
2,409.41 
2,656.44 
2,800.14 

$2,800.14 


DEPRECIATED 

VALUE 

$3,000.00 

1,745.19 

1,015.23 

590.59 

343.56 

199.86 

$   199.86 


The  discrepancy  of  14  cents  is  due  to  the  fact  that  a  six-place  table  of  log- 
arithms was  used.  The  longer  the  life  of  the  asset,  the  more  nearly  will  the 
reducing  balance  method  approach  the  straight-line  method. 

3.  SINKING  FUND  METHOD — In  this  method  an  amount  of  money  is  set  aside 
each  year  along  with  the  regular  provision  for  depreciation,  the  money  being 
deposited  outside  the  business  and  accumulating  at  compound  interest.   The 
amount  to  be  charged  against  the  expenses  of  the  business  will  be  the  same 
each  year,  and  will  be  computed  according  to  the  following  formula: 


D  =  (C  -  S)- 


(r  -  1) 
(rn  -  1) 


r  being  the  rate,  which,  if  the  interest  to  be  allowed  is  4%,  will  be  stated 
as  1.04  for  the  purposes  of  this  formula.  Supposing  the  interest  in  our  il- 
lustration is  4%  compounded  annually,  the  following  table  may  be  set  up: 


YEARLY   TOTAL  CREDIT  DEPRECIATED 


CASH  SET 

COMPOUND 

Cost  I 
First 

ASIDE  YEARLY 

INTEREST 
« 

lew 
year 

9 

516. 

,96 

^->-— — 

Second  year 

516. 

,96 

20. 

,68 

Third 

year 

516. 

,96 

42. 

,18 

Pourti 

\   year 

516. 

.96 

64. 

,55 

lifth 

year 

516. 

.94 

87, 

,81 

PROVISION   TO  RESERVE 


VALUE 


$ 

$3,000.00 

516.96 

516.96 

2,483.04 

516.96 

537.64 

1,945.40 

516.96 

559.14 

1,386.26 

516.96 

581.51 

804.75 

516.94 

604.75 

200.00 

Total 


$2,584.78   $215.22 


$2,584.78   $2,800.00   $  200.00 


[The  method  as  outlined  is  rarely  used.   It  is  considered  better  practice  to 
retain  the  cash  in  the  business  and  charge  the  interest  element  direct  to  op- 
erations. 

Other  methods  used  are  described  on  the  following  page. 


Copyright,  1917,  The  Ronald  Press  Company 


1-21-6 

RESERVE  FOR  BAD  DEBTS 
Every  business  which  caters  to  the  general  trade  suffers  losses  from  un- 
collectible accounts  and  notes.   These  losses  are  an  expense  of  carrying  on  the 
business  and  are  shown  on  a  statement  of  profits  and  income  as  a  selling  or 
administrative  expense,  or,  as  advocated  by  a  few  writers,  as  a  "financial" 
expense,  i.e.,  deducted  with  such  items  as  interest  paid  from  net  profits.  At 
the  end  of  each  accounting  period  an  estimate  is  made  of  the  iincollectible  ac- 
counts through  any  of  the  following  methods: 

1.  A  percentage  of  net  sales 

2.  A  percentage  of  outstanding  accounts 

3.  An  inspection  of  the  accounts 

4.  Past  experience 

and  an  adjusting  entry  made  as  follows: 

Bad  Debts  (an  expense  account)  $500.00 

To — Reserve  for  Bad  Debts  (a  valuation  account)         $500.00 
To  take  up  estimate  of  loncollectible  accounts. 

The  reserve  serves  to  hold  the  expected  loss  temporarily  until  the  worthless 
accounts  can  be  found,  since  it  is  usually  not  possible  to  ascertain  in  ad- 
vance just  which  accounts  will  prove  to  be  worthless.  An  account,  having 
proven  bad,  is  written  off  as  follows: 

Reserve  for  Bad  Debts  $  75.00 

To — Customer's  Account  $  75.00 

To  write  off  uncollectible  account. 

If  the  account  is  afterwards  collected,  the  sum  received  is  generally  credited 
to  the  reserve. 

Theoretically  the  loss  from  bad  debts  is  composed  of  two  elements:  (1)  the 
cost  of  the  merchandise  which  the  customer  does  not  pay  for,  and  (2)  gross 
profit,  with  which,  in  addition  to  the  cost  of  the  merchandise,  the  customer 
has  been  charged.   The  loss  of  gross  profit  is  not  an  operating  expense,  but 
income  never  received;  however,  the  two  elements  are  not  distinguished  in 
practice,  the  loss  of  gross  profit  being  a  relatively  small  figure.     i^  j^v'  ' 

RESERVE  FOR  DISCOUNTS 
A  reserve  for  discounts  measures  the  overstatement  of  customers'  accounts 
on  account  of  cash  discounts  to  be  taken.   It  is  created  by  a  debit  to  Dis- 
counts on  Sales  account: 

Discounts  on  Sales  (an  expense  account)  $300.00 

To — Reserve  for  Discounts  $300.00 

To  provide  for  discounts  expected  to  be  taken. 

At  the  beginning  of  the  following  period  the  entry  is  reversed. 

Both  the  reserve  for  bad  debts  and  reserve  discounts  are  valuation  ac- 
counts and  therefore  are  deducted  on  the  balance  sheet  from  the  assets  to 
which  they  apply. 

REFERENCES : 

Hatfield,  pages  121-142 
Leake,  pages  67-135 
Montgomery,  pages  401-429 
Saliers,  pages  13-33,  39-48 

Copyright,  1917,  The  Ronald  Press  Company 


1-22-1 


I 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  22 

SURPLUS 


Problem  17 

The  H.  K.  Jerome  Co.  is  a  manufacturing  corporation  which  has  been  in 
business  for  many  years.  On  January  1,  1917,  they  commenced  operations  for  the 
year  1917  in  an  entirely  new  plant,  the  financing  of  which  was  accomplished 
through  the  issue  of  ten  notes  of  $20,000  each,  interest  at  6%,  the  notes  ma- 
turing at  the  rate  of  one  each  year  commencing  with  January  1,  1918.   The  old 
plant  was  disposed  of  for  $10,000  in  cash  during  December,  1916,  and  the  bal- 
£ince  sheet  prepared  at  December  31,  1916,  showed  the  following  condition  of 
the  business: 


Plant 

Less  Scrap 
Value  real- 
ized 

Current  Assets 


Total  Assets 


ASSETS 
$225,000.00 


10,000.00  $215,000.00 
80,000.00 


LIABILITIES 
Capital  Stock 
Surplus 

Profit  and  Loss  for  1916: 
Net  Sales  $100,000.00 
Less — Operat  ing 

Expenses    75,000.00 


$295,000.00 


Floating  Debt 


Total  Liabilities 


$200,000.00 
50,000.00 


25,000.00 


20,000.00 


$295,000.00 


( 


The  new  plant  was  entered  on  the  books  at  $200,000  on  January  1,  1917,  and 
is  expected  to  have  a  life  of  20  years  (with  a  probable  scrap  value  similar  to 
the  old  plant).   Owing  to  competition  and  limited  demand  for  the  products,  the 
sales  are  not  expected  to  increase,  but  the  new  and  improved  machinery,  with 
better  methods  of  manufacture,  saves  10%  in  operating  expenses  according  to 
the  estimate  of  the  manager. 

At  December  31,  1917,  a  second  balance  sheet  was  prepared: 


ASSETS 


Plant 

Current  Assets 


$415,000.00 
112,500.00 


LIABILITIES 
Capital  Stock 
Surplus 

Profit  and  Loss  for  1917: 
Net  Sales  $100,000.00 
Less — Operat  ing 

Exp.        67,500.00 


Total  Assets 


$527,500.00 


Notes  Payable 
Floating  Debt 

Total  Liabilities 


$200,000.00 
75,000.00 


32,500.00 

200,000.00 
20,000.00 

$527,500.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-22-2 

Interest  on  the  notes  payable  has  been  included  in  the  operating  expenses 
of  $67,500.   The  directors,  having  examined  the  balance  sheet,  decide  to  de- 
clare a  dividend. 

Discuss  the  foregoing  and  prepare  a  statement  which,  in  your  opinion,  will 
more  accurately  display  the  financial  position  of  the  business  on  December  31, 
1917. 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

Record  entries  necessary  to  close  the  books  on  May  31,  post  same  to  gen- 
eral ledger,  and  prepare  trial  balance. 

Solution  to  Assignment  1-21-1 

ADJUSTING  JOURNAL  ENTRIES  NECESSARY  BEFORE  CLOSING  BOOKS 
OF  MILLER  MOTOR  CAR  CO. ,  MAY  31 

(1) 
Interest  Paid  $     59.46 

To — Interest  Accrued  on  Notes  Payable  $     59.46 

Interest  accrued  during  May  on  notes  pay- 
able and  bank  loans  as  follows: 

$10,000.00  12  days  @  6%  $20.00 

3,000.00  31  days  @  Q%  15,50 

10,000.00  12  days  @  5%  16.67 

3,500.00  15  days  @  5%  7.29 


$59.46 

(2) 
Bond  Interest  625.00 

To — Bond  Interest  Accrued  625.00 

Interest  accrued  May  31  on  bonds  outstanding. 

(3) 
Depreciation  916.66 

Depreciation  on  Fixtures  7.25 

Depreciation  on  Delivery  Equipment  21.88 

To — Reserve  for  Depreciation  of  Buildings  83.33 

Reserve  for  Depreciation  of  Machinery  833.33 

Reserve  for  Depreciation  of  Fixtures  7.25 

Reserve  for  Depreciation  of  Delivery 

Equipment  21.88 

To  set  up  reserves  according  to  schedules. 

(4) 
Bad  Debts  916.97 

To — Reserve  for  Bad  Debts  916.97 

To  provide  reserve  for  bad  debts  at  Vzfo   of 
gross  sales. 

(5) 
Taxes  247.67 

To — Taxes  Accrued  247.67 

Additional  taxes  accrued  during  May. 

Copyright,  1917,  The  Ronald  Press  Company 


(6) 
Insurance 

To — Unexpired  Insurance 
Insurance  expired  during  May  as  per  schedule. 


$76.67 


1-22-3 


$76.67 


(7) 


Miscellaneous  Selling  Expenses 
To — Rent  Prepaid 
Rent  expired  during  May. 


50.00 


50.00 


(8) 
Stationery  and  Printing 

To — Inventory  of  Miscellaneous  Supplies 
Supplies  consumed  during  May. 


100.00 


100.00 


(9) 


Inventory  of  Raw  Materials 

To — Purchases  Raw  Materials 
To  transfer  purchases. 


10,121.18 


10,121.18 


(10) 
Work  in  Progress 

To — Inventory  of  Raw  Materials 
Total  of  requisitions  issued  during  month. 


8,754.78 


8,754.78 


(11) 


Inventory  of  Finished  Parts 

To — Purchases  Finished  Parts 
To  transfer  purchases. 


67,888.81 


67,888.81 


(12) 
Work  in  Progress 
Cost  of  Sales — Finished  Parts 

To — Inventory  of  Finished  Parts 
Finished  Parts  transferred  to  Work  in 
Progress  and  Sold  during  month. 


55,101.55 
14,953.18 


70,054.73 


(13) 
Work  in  Progress 

To — Direct  Labor 
Indirect  Labor 
Heat,  Light,  and  Power 
Repairs — Pl£uit  and  Equipment 
Shop  Supplies 
Depreciation 
Insurance 
Taxes 

Miscellaneous  Factory  Expenses 
To  close  out  cost  of  work  in  progress. 


37,786.05 


20,394.07 

9,057.87 

2,591.85 

3,478.53 

843.75 

916.66 

76.67 

247.67 

178.98 


Copyright,  1917,  The  Ronald  Press  Company 


1-22-4 


(14) 
Inventory  Automobiles  $96,232.21 

To — Work  in  Progress  $96,232.21 

To  transfer  cost  of  automobiles  completed 
during  month  as  per  recapitulation  of 
cost  sheets. 

(15) 
Cost  of  Sales — Automobiles  121,213.96 

To — Inventory  of  Automobiles  121,213.96 

To  transfer  cost  of  automobile  sales. 

Solution  to  Problem  16 

(a) 

ENTRIES  ON  FACTORY  JOURNAL 
10  CLOSE  FACTORY  LEDGER  AT  JUNE  30,  1917 

(1) 
Taxes  250.00 

Insurance  100.00 

To — General  Ledger  Account  $    350.00 

To  take  up  accrued  items  as  per  entry  in 
general  journal. 

(2) 
Work  in  Process  38,200.00 

To— Raw  Materials  38,200.00 

Total  of  requisitions  issued  for  month,  as 
per  requisitions  journal. 

(3) 
Work  in  Process  11,450.00 

To — Factory  Supplies  800.00 

Direct  Labor  '  8,550.00 

Superintendence  650.00 

Heat,  Light,  and  Power  880.00 

Taxes  250.00 

Insurance  100.00 

Miscellaneous  Factory  Expenses  220.00 

To  close  out  manufacturing  cost,  as  per 
ledger  accounts 

(4) 
Finished  Stock  48,500.00 

To— Work  in  Process  48,500.00 

Stock  completed  during  June  as  per  finished 
stock  journal. 

(5) 
General  Ledger  50,100.00 

To— Finished  Stock  50,100.00 

Cost  of  stock  sold  during  month  as  per 
sales  book  and  charged  to  customers  in 
general  ledger. 

Copyright,  1917,  The  Ronald  Press  Company 


ENTRIES  ON  GENERAL  JOURNAL 
TO  CLOSE  GENERAL  LEDGER  AT  JUNE  30,  1917 


1-22-5 


(1) 
Office  Salaries 

To — Salaries  Accrued 
Office  salaries  accrued  and  unpaid, 


(   230.00 


$   230.00 


Interest  Expense 

To — Interest  Prepaid 
Prepaid  interest  expired. 


(2) 


(3) 


Trading  Account 

To — Factory  Ledger 
To  transfer  cost  of  sales  for  month. 


200.00 


50,100.00 


200.00 


50,100.00 


(4) 


Sales 

To — Trading  Account 
To  transfer  sales  for  month. 


56,000.00 


56,000.00 


(5) 
Trading  Account 

To — Profit  and  Loss 
To  close  out  gross  profits  for  June. 


5,900.00 


5,900.00 


(6) 
Profit  and  Loss 

To — Discount  on  Sales 
Office  Salaries 
General  Expense 

Salesmen's  Salaries  and  Expense 
Sales  Office  Salaries  and  Expense 
Interest  Expense 
To  close  out  expense  accounts. 


4,590.00 


100.00 
1,800.00 
800.00 
950.00 
740.00 
200.00 


(7) 
Discounts  on  Purchases 
Interest  Received 

To — Profit  and  Loss 
To  close  out  miscellaneous  income  accounts. 


130.00 
650.00 


780.00 


(8) 
Profit  and  Loss 

To — Surplus 
Net  profits  for  June  carried  to  Surplus. 


2,090.00 


2,090.00 


Copyright,  1917,  The  Ronald  Press  Company 


(b) 


1-22-6 

Exhibit  A 


ASSETS 
CAPITAL  ASSETS: 


Real  Estate 

$15,000 

Buildings  &  Equip. 

55,000 

WORKING  ASSETS: 

Fuel  Supplies 

$   400 

Prepaid  Interest 

100 

Unexpired  Insurance 

580 

CURRENT  ASSETS: 

Inventories  of — 

Finished  Goods 

$  4,200 

Work  in  Process 

5,250 

Raw  Materials 

2,200 

Notes  Receivable 

1,500 

Accounts  Receivable 

44,500 

Cash 

18,100 

INDEPENDENCE  MANUFACTURING  CO. 
BALANCE. SHEET,  JUNE  30,  1917 

CAPITAL  &  LIABILITIES 
CAPITAL  STOCK: 

Issued  and  Outstanding 
170,000   CURRENT  LIABILITIES: 

Bank  Loans        | 10, 000 


$75,000 


1,080 


Accounts  Payable 
Salaries  Unpaid 
Taxes  Accrued 

Notes  Receivable 
Discounted   $5,000 


15,800 

230 

1,400 


27,430 


SURPLUS : 

Balance,  May  31, 

1917 
Profits  for  June 

(Exhibit  B) 


$42,310 


2,090 


75,750 


$146,830 

(c) 

INDEPENDENCE  MANUFACTURING  CO. 

STATEMENT  OF  PROFITS  AND  INCOME 

MONTH  ENDING  JUNE  30,  1917 

SALES 

COST  OF  SALES  (Exhibit  C) 


GROSS  PROFIT  ON  SALES 
DEDUCT— SELLING  AND  GENERAL  EXPENSES: 
Selling  Expenses: 

Salesmen's  Salaries  and  Expense 
Sales  Office  Salaries  and  Expense 
General  Expenses: 
Office  Salaries 
General  Expense 


44,400 


$146,830 


Exhibit  B 


$56,000.00 
50,100.00 

$  5,900.00 


$950.00 
740.00  $1,690.00 


;i,800.00 

800.00   2,600.00 


NET  PROFIT  FROM  OPERATIONS 
ADD— MISCELLANEOUS  INCOME: 
Discounts  on  Purchases 
Interest  Received 

DEDUCT— INTEREST  CHARGES: 
Interest  Expense 

SURPLUS  NET  PROFITS  (Exhibit  A) 

Copyright,  1917,  The  Ronald  Press  Company 


$130.00 
650.00 


4',  290. 00 
$1,610.00 

780.00 

$  2,390.00 
300.00 

$  2,090.00 


1-22-7 
Eachibit  C 


(d) 

INDEPENDENCE  MANUFACTURING  CO. 

STATEMENT  OF  COST  OF  MANUFACTURE  AND  OF  SALES 

MONTH  ENDING  JUNE  30,  1917 

MATERIALS 
DIRECT  LABOR 
FACTORY  OVERHEAD: 

Supplies 

Superintendence 

Heat,  Light,  and  Power 

Taxes 

Insurance 

Miscellaneous  Expense 

TOTAL  MANUFACTURING  COST 
DEDUCT — Increase  in  Inventory  of  Work  in  Process — 
May  31,  1917 
June  30,  1917 

COST  OF  GOODS  COMPLETED 
ADD — Decrease  in  Inventory  of  Finished  Stock — 
May  31,  1917 
June  30,  1917 

COST  OF  FINISHED  STOCK  SOLD  (Exhibit  B) 


$38,200.00 

8,550.00 

$800.00 

650.00 

880.00 

250.00 

100.00 

220.00 

2,900.00 

$49,650.00 

$4,100.00 

5,250.00 

1,150.00 

$48,500.00 

$5,800.00 

4,200.00 

1,600.00 

$50,100.00 

Copyright,  1917,  The  Ronald  Press  Company 


1-22-8 

SURPLUS 

DEFINITION — Surplus  is  the  excess  of  the  total  assets  over  the  total  lia- 
bilities and  capital  stock  of  a  corporation.   Normally  it  represents  the 
amount  of  realized  profits  which  has  not  been  appropriated  for  specific  pur- 
poses, and  therefore  is  available  for  dividends.   In  some  companies,  notably 
banks,  a  distinction  is  drawn  between  "Surplus"  and  "Undivided  Profits,"  the 
former  referring  to  that  part  which  has  been  set  aside  permanently,  and  the 
latter  to  that  part  which  is  available  for  dividends.   Adding  capital  stock  to 
surplus  gives  "Net  Worth"  or  "Book  Value"  of  the  business. 

PROFIT  AND  LOSS  ACCOUNT— In  a  sole  proprietorship  or  partnership  the  bal- 
ance of  the  Profit  and  Loss  account  is  carried  to  the  proprietors'  accounts, 
while  in  a  corporation  the  balance  is  carried  to  Undivided  Profits  account  or 
Surplus  account.   Public  utilities  under  jurisdiction  of  the  Interstate  Com- 
merce Commission  are  required  to  keep  a  Profit  and  Loss  account  which  is 
equivalent  to  a  Surplus  account  as  the  latter  term  is  used  by  mercantile  and 
industrial  businesses. 

UNDIVIDED  PROFITS  ACCOUNT — As  stated,  the  balance  of  the  Profit  and  Loss 
account  is  sometimes  carried  to  an  Undivided  Profits  ledger  account.   Part  of 
the  undivided  profits  may  be  paid  out  in  dividends,  part  may  be  transferred  to 
Surplus  ledger  account,  and  part  may  remain  in  the  Undivided  Profits  ledger 
account. 

APPROPRIATED  SURPLUS — This  term  is  applied  to  reserves  for  contingencies, 
sinking  fund  reserves,  etc.,  which  are  part  of  the  net  worth  or  book  value  of 
the  corporation,  but  which,  for  the  time  being,  are  set  aside  for  special  pur- 
poses by  formal  action  of  the  board  of  directors. 

FREE  SURPLUS — This  term  is  equivalent  to  imdivided  profits,  and  refers  to 
the  portion  of  surplus  available  for  dividends. 

CAPITAL  SURPLUS — This  applies  to  that  part  of  surplus  which  has  not  been 
earned  through  operations.   It  is  distinct  from  ordinary  surplus  and  should  be 
shown  separately  on  the  balance  sheet.   Capital  surplus  may  arise  from  the 
following  sources: 

1.  CONTRIBUTIONS  FROM  STOCKHOLDERS: 

(a)  Premiums  on  Sale  of  Capital  Stock.   Thus,  if  1,000  shares,  par  value 
$100,  are  disposed  of  at  125,  $25,000  of  the  receipts  should  be  credited  to 
Capital  Surplus  or  to  a  similar  account.   The  premium  paid  is  not  an  earning. 
In  the  case  of  a  new  corporation  the  excess  may  represent  an  amount  contrib- 
uted for  working  capital  purposes,  and  is  therefore  as  much  a  part  of  the 
capital  investment  as  the  par  value  of  $100,000;  or  if  contributed  to  pay 
promoters*  expenses,  expenses  of  incorporation,  etc.,  the  excess  will  be  so 
applied.   In  the  case  of  an  established  corporation,  a  premium  given  on  sale 
of  additional  securities  usually  means  that  the  earnings  have  influenced  the 
sale  price  figure  of  the  new  stock. 

Copyright,  1917,  The  Ronald  Press  Company 


1-22-9 

(b)  Donations  of  Capital  Stock.   The  type  of  financing  illustrated  by  this 
procedure  is  common  in  the  case  of  mines,  oil  wells,  etc.,  where  the  asset 
purchased  with  the  stock  is  a  wasting  asset.   The  vendor  conveys  the  property 
for  a  specified  amount  of  capital  stock  and  with  the  understanding  that  a 
specified  amount  of  the  stock  received  is  to  be  donated  to  the  company,  sind 
from  the  sale  thereof  funds  will  be  obtained  for  working  capital. 

(c)  Assessments  on  Stock.   The  term  "assessments"  refers  to  a  "call"  on 
stock  not  fully  paid  up  (usually  after  a  period  of  operation),  or  to  a  levy  on 
fully  paid-up  stockholders  to  enable  the  corporation  to  continue  operations. 
In  the  latter  case  the  assessment  is  credited  to  Capital  Surplus. 

(d)  Undercapitalization.   Illustration  has  already  been  given  of  a  new 
corporation  taking  over  the  net  assets  of  a  business,  the  value  of  which  ex- 
ceeded the  par  value  of  the  stock.   This  is,  in  effect,  a  premium  on  the 
issue,  provided  the  assets  taken  over  are  not  overvalued. 

2.  BOOK  ENTRIES.   Increases  in  the  value  of  land  or  other  capital  asset, 
if  it  is  desirable  to  put  such  increase  on  the  books,  should  be  credited  to 
Capital  Surplus  account,  and  taken  out  of  Capital  Surplus  and  transferred  to 
ordinary  surplus  in  case  the  asset  is  sold  and  the  profit  realized. 

REFERENCES : 

Bennett,  pages  334-337 
Montgomery,  pages  199-200,  206 
Esquerre,  pages  357-359 


Copyright,  1917,  The  Ronald  Press  Company 


1-23-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  23 

DIVIDENDS 


Problem  18 

The  Vanadium  Manufacturing  Co.  is  a  New  York  corporation;  its  common  stock 

has  been  issued  "without  par  value."   The  preferred  stock  has  a  par  value 
of  $100  per  share  and  is  cumulative,  non-participating,  and  non-voting.   At 
the  annual  meeting  of  the  board  of  directors  on  December  20,  1917,  a  dividend 

of  7%  is  declared  on  the  preferred  stock  and  $3  per  share  on  the  common,  pay- 
able January  15,  1918,  to  stockholders  of  record  January  1,  1918.   The  follow- 
ing is  a  trial  balance  of  the  general  ledger  December  31,  1917: 

Real  Estate  $  30,000.00 

Buildings  50,000.00 

Machinery  and  Equipment  175,000.00 

Good-will  50,000.00 
Inventory  of  Finished  and  Partly  Finished  Goods, 

January  1,  1917  21,000.00 

Inventory  of  Raw  Materials,  January  1,  1917  17,000.00 

Accounts  Receivable  8,000.00 

Cash  in  Bank  14,000.00 

Petty  Cash  Fund  500.00 

Preferred  Stock  (1,200  shares)  $120,000.00 

Common  Stock  (2,500  shares)  125,110.00 

Surplus,  January  1,  1917  23,190.00 

Accounts  Payable  24,000.00 

Accrued  Taxes  2,200.00 

Reserve  for  Depreciation  of  Buildings  10,000.00 

Reserve  for  Depreciation  of  Machinery  and  Equipment  35,000.00 

Sales  450,000.00 

Purchases  Raw  Materials  245,000.00 

Direct  Labor  75,000.00 

Heat,  Light  and  Power  11,000.00 

Superintendence  10,000.00 

Maintenance  and  Repairs  5,000.00 

Taxes  2,200.00 

Miscellaneous  Factory  Expense  5,800.00 

Officers*  Salaries  25,000.00 

Office  Salaries  10,000.00 

General  Expense  9,000.00 

Salesmen's  Salaries  and  Commissions  -.  15,000.00 

Salesmen's  Expenses  :.' 3,000.00 

Advertising  6,000.00 

Sales  Dlscoimts  2,000.00 


$789,500.00  $789,500.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-23-2 
Inventories  on  December  31,  1917,  were  composed  of:  finished  and  partly 
finished  goods  $25,000;  raw  materials  $15,000.   Accrued  taxes  not  on  books 
$200.   Yearly  provision  for  depreciation,  3%  on  buildings,  10%  on  machinery 
and  equipment  (straight-line  method) ;  provision  for  1917  does  not  yet  appear 
on  books.   The  dividends  declared  have  not  yet  been  recorded. 

Prepare  statements  to  show  financial  condition  on  December  31,  1917,  and 
results  from  operation  during  year  ending  that  date. 


WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

Prepare  balance  sheet  at  May  31,  and  statement  of  profits  and  income  for 
month  of  May. 

Solution  to  Assignment  1-22-2 

MILLER  MOTOR  CAR  CO. 
TRIAL  BALANCE,  MAY  31,  19— 
ACCOUNT  DEBIT       CREDIT 

Land  $  25,000.00 

Buildings  50,000.00 

Reserve  for  Depreciation  of  Buildings  $     83.33 

Machinery,  Tools,  and  Equipment  105,603.50 

Reserve  for  Depreciation  of  Machinery  833.33 

Office  and  Warehouse  Fixtures  1,450.00 

Reserve  for  Depreciation  of  Fixtures  7.25 

Delivery  Equipment  1,750.00 

Reserve  for  Depreciation  of  Delivery  Equipment  21.88 

Good-will  66,000.00 

Subscriptions — Common  Stock  10,000.00 

Inventory  of  Automobiles,  May  31  8,218.25 

Inventory  of  Work  in  Progress,  May  31  5,410.17 

Inventory  of  Raw  Materials,  May  31  1,366.40 

Inventory  of  Finished  Parts,  May  31  3,724.08 

Inventory  of  Miscellaneous  Supplies  200.00 

Customers'  Accounts  117,889.61 

Notes  Receivable  48,025.00 

Reserve  for  Bad  Debts  916.97 

Cash  in  Bank  9,082.62 

Petty  Cash  Fund  500.00 

Unexpired  Insurance  843.33 

Rent  Paid  in  Advance  150.00 

Capital  Stock — Preferred  100,000.00 

Capital  Stock — Common  100,000.00 

5%  First  Mortgage  Bonds  150,000.00 

Notes  Payable  3,500.00 

Bank  Loan  13,000.00 

Audited  Vouchers  70,885.14 

Accrued  Interest  on  Notes  Payable  45.46 

Accrued  Bond  Interest  625.00 

Accrued  Taxes  447.67 

Accrued  Pay-roll  7,581.91 

Sales — Automobiles  164,065.00 

Sales — Finished  Parts  19,329.75 

Copyright,  1917,  The  Ronald  Press  Company 


Discount  on  Sales — Finished  Parts 

Cost  of  Sales — Automobiles 

Cost  of  Sales — Finished  Parts 

Discount  on  Purchases 

Interest  Received 

Consignment  Earnings 

Salesmen's  Salaries 

Salesmen's  Traveling  Expenses 

Advertising 

Freight -Out 

Delivery  Equipment  Maintenance 

Depreciation  of  Delivery  Equipment 

Miscellaneous  Selling  Expenses 

Depreciation  of  Office  and  Warehouse  Fixtures 

Office  Salaries 

Salaries  of  Officers 

Stationery  and  Printing 

Bad  Debts 

Miscellaneous  General  Expense 

Bond  Interest  , 

Other  Interest  Paid 


914.60 

121,213.96 

14,953.18 


3,358.95 

475.81 

31,882.29 

103.50 

10.48 

21.88 

50.00 

7.25 

628.95 

1,800.00 

590.80 

916.97 

60.62 

625.00 

59.46 


1-23-3 


1,093.97 
150.00 
300.00 


$632,886.66  $632,886.66 


SCHEDULE  OF  UNPAID  VOUCHERS 
VOUCHER 

NO.        FAVOR  OF 

23  Specialties  Mfg.  Co. 

33  Auto.  Accessories  Mfg.  Co. 

34  Specialties  Mfg.  Co. 

35  New  Idea  Lamp  Co. 

40  B.  F.  Goodrich  Co. 

41  Auto.  Accessories  Mfg.  Co. 

42  Standard  Wheel  Co. 

44  Western  Printing  Co. 

45  Best  Drop  Forge  Works 

46  Briscoe  Radiator  Co. 

47  U.  S.  Advertising  Company 

48  Crown  Automobile  Company 

Total 


SCHEDULE  OF  CUSTOMERS'  ACCOUNTS 


AMOUNT 

DISTRICT 

AMOUNT 

$  1,202.85 

#1 

$48,203.58 

6,785.03 

2 

9,945.35 

2,882.50 

3 

9,682.20 

811.19 

4 

28,972.03 

910.17 

5 

7,519.46 

312.37 

7 

9,100.68 

1,933.25 

8 

4,466.31 

626.84 

1,932.94 

Total 

$117,889.61 

2  750.00 

30,738.00 

20.000.00 

$70,885.14 

Copyright,  1917,  The  Ronald  Press  Company 


1-23-4 

DIVIDENDS 

DEFINITION — A  dividend  is  a  portion  of  profits  or  surplus  of  a  corpora- 
tion set  aside  by  action  of  the  board  of  directors  for  distribution  among 
stockholders.   The  distribution  may  consist  of  the  transferring  of  whatever 
property  or  property  rights  the  directors  may  desire  to  distribute. 

KINDS  OF — The  nature  of  the  various  kinds  of  dividends  is  indicated  by 
their  titles: 

1.  CASH  DIVIDEND — a  distribution  of  cash.  Unless  otherwise  qualified 

the  term  "dividend"  refers  to  a  cash  dividend. 

2.  STOCK  DIVIDEND — a  distribution  of  treasury  stock  or  unissued  stock. 

3.  SCRIP  DIVIDEND — a  distribution  of  "scrip,"  i.e.,  promissory  notes, 

usually  interest-bearing.   This  kind  of  dividend  is  sometimes  de- 
clared by  railroads  and  other  corporations  for  the  purpose  of  re- 
taining in  the  business  the  funds  with  which  the  scrip  must  be 
finally  liquidated. 

4.  PROPERTY  DIVIDEND— a  distribution  of  some  kind  of  property,  other 

than  cash.  A  large  munitions  manufacturer  in  1916  declared  such 
a  dividend  payable  in  Anglo-French  bonds. 

The  term  "dividend"  is  also  applied  to  other  distributions  of  property, 
such  as  bonuses  to  employees  under  profit-sharing  schemes,  etc.,  and  distribu- 
tions of  property  to  stockholders  when  a  corporation  winds  up  its  affairs. 

DECLARATION — A  dividend  is  "declared"  by  resolution  of  the  directors,  and 
until  such  resolution  is  passed  the  books  of  the  corporation  reflect  no  lia- 
bility, even  to  cumulative  preferred  shareholders,  on  account  of  proposed 
dividends.   The  directors  have  sole  authority  to  dispose  of  corporate  profits 
and  no  action  on  the  part  of  stockholders  can  force  them  to  pay  out  dividends, 
unless,  of  course,  some  fraudulent  intent  can  be  shown.   Once  declared,  the 
amount  of  the  dividend  becomes  a  liability  of  the  corporation  enforcible  by 
the  stockholders  through  legal  action. 

The  declaration  and  payment  may  be  made  on  the  same  date.   This  is  possi- 
ble only  in  a  small  corporation.   In  a  larger  business  there  are  usually  three 
important  dates  in  connection  with  each  dividend  declared: 

1.  Date  of  declaration. 

2.  Date  stock  records  are  closed.   The  time  elapsing  from  (1)  to  (2) 

is  utilized  by  purchasers  of  stock  (on  the  open  market  for  in- 
stance) by  having  their  ownership  properly  inscribed  on  the  stock 
ledger  of  the  corporation.   Thereafter  dividends  are  payable  only 
to  "stockholders  of  record"  on  the  day  the  stock  ledger  is 
closed.   Stock  sold  between  (2)  and  (3)  is  sold  "ex-dividend" — 
the  right  to  the  dividend  declared  being  retained  by  the  seller. 

3.  Date  of  payment. 

These  dates  are  indicated  in  the  resolution  authorizing  the  dividend. 


Copyright,  1917,  The  Ronald  Press  Company 


1-23-5 

PROFITS  AVAILABLE  FOR  DISTRIBUTION — Directors  have  a  wide  discretion  in 
declaring  dividends.   They  may  declare  a  dividend  up  to  the  total  net  profits 
available  for  distribution.   If  a  portion  of  the  profits  of  prior  years  has 
not  been  distributed  in  dividends  but  has  been  allowed  to  accumulate  in  the 
Surplus  account,  a  dividend  may  be  declared  out  of  such  accumulated  surplus, 
even  though  the  operations  of  the  current  period  have  resulted  in  profits  of 
an  amount  less  than  the  dividend  or  even  a  loss.   The  amount  of  a  dividend  is 
otherwise  always  a  matter  of  policy  which  is  based  on  a  consideration  of  many 
points.   It  has  been  generally  held  that  dividends  cannot  be  paid  "from  capi- 
tal," i.e.,  where  the  result  of  the  payment  is  to  create  or  add  to  an  already 
existing  deficit.   However,  dividends  paid  by  a  mining  corporation  may  include 
a  return  of  both  profits  and  capital  invested. 

Courts  have  held  that  dividends  may  be  paid  from  surplus  arising  from 
sources  other  than  operations,  such  as  increase  in  property  values,  donations 
of  stockholders,  etc.,  although  as  a  matter  of  business  policy  such  dividends 
might  be  objectionable,  especially  if  paid  in  cash. 

PAYMENT — In  a  small  corporation  payment  of  cash  dividends  may  be  made  to 
stockholders  in  currency  or  by  check,  the  stockholder  signing  a  receipt.   With 
larger  corporations  it  is  the  practice  to  deposit  the  required  amount  in  a 
separate  bank  account  and  to  draw  checks  against  it. 

ENTRIES — When  a  dividend  is  declared,  an  entry  similar  to  the  following  is 
necessary: 

-January  5,  1917- 
Dividends  (a  nominal  account  to  be  carried  to 

Surplus)  $20,000.00 

To — Dividends  Payable  $20,000.00 

To  record  dividend  of  10%  declared  on  common 
stock  by  resolution  of  the  Board  of  Direc- 
tors at  their  annual  meeting  held  today, 
payable  March  1  to  stockholders  of  record 
February  1. 

And  when  paid: 

-March  1,  1917- 
Dividends  Payable  $20,000.00 

To — Cash  (Unissued  or  Treasury  Stock,  etc.)  $20,000.00 

To  record  payment  of  dividend  declared  January  5. 

Dividends  may  be  numbered  consecutively,  for  various  purposes. 

REFERENCES : 

Bennett,  pages  133-155 
Oilman,  pages  321-328 
Hatfield,  pages  214-231 


Copyright,  1917,  The  Konald  Press  Company 


1-24-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  24 

REDEMPTION  OF  BONDS 


Problem  19 

A  bond  issue  of  the  X  Y  Co.  is  dated  April  1,  1909,  and  consists  of  500 
bonds  having  a  par  value  of  $1,000  each,  running  50  years  and  bearing  interest 
at  5%.  Under  the  title  of  "Sinking  Fund  Assets"  the  following  details  appear 
on  the  balance  sheet  prepared  December  31,  1916: 


Bonds  of  X  Y  Co. 
Bonds  of  A  B  Co. 
Cash 

Total 


$50,000.00 
15,000.00 
10,100.00 

$75,100.00 


On  June  30,  1917,  the  trustee  holding  the  sinking  fund  assets  renders 
the  following  report  for  the  six  months  ended  that  date: 


Dec   31,  1916  Cash  balance 

RECEIPTS 

April  1,  1917  Instalment  #8  received 

April  1,  1917  Coupons  on  Bonds  of  X  Y  Co.  ($50,000  @  5%, 

due  Apr.  1  and  Oct.  1) 
May   1,  1917  Coupons  on  Bonds  of  A  B  Co.  ($15,000  @  6%, 

due  May  1  and  Nov.  1) 
May   1,  1917  Sale  of  Bonds  of  A  B  Co  at  104 
June  30,  1917  Interest  on  Cash  Balance 


PAYMENTS 

May   1,  1917  Purchase  of  Bonds  of  X  Y  Co.  (36  at  par 
and  accrued  interest) 

May   1,  1917  Commission  on  Sale  and  Purchase  of  bonds 

June  30,  1917  Expenses  of  Trustee  (clerical  help,  sta- 
tionery, etc.)  for  six  months  ending  June 
30,  1917 

June  30,  1917  Cash  Balance 


$10,100.00 

$10,000.00 

1,250.00 

450.00 
15,600.00 

240.00  27.540.00 


$36,150.00 
250.00 


$37,640.00 


50.00  36.450.00 


$1,190.00 


Give  Journal  entries  necessary  on  the  books  of  the  X  Y  Co.  relative  to  the 
sinking  fund  from  December  31,  1916,  to  June  30.  1917.  and  indicate  how  the 
account  would  be  shown  in  the  balance  sheet  prepared  at  June  30,  1917. 

Copyright,  1917,  The  Ronald  Press  Company 


MISCELLANEOUS  QUESTIONS 


1-24-2 


Question  74 — What  differences  would  you  expect  to  find  in  the  accounting 
procedure  (a)  where  the  sinking  fund  assets  are  turned  over  to  the  trustee 
under  the  indenture,  or  (b)  where  the  assets  are  retained  in  the  corporation's 
treasury? 

Question  75 — "The  company  under  its  trust  deed  is  required  to  set  aside  a 
certain  percentage  of  its  profits  at  the  close  of  each  year  to  provide  a  sink- 
ing fund  for  retiring  its  bonded  indebtedness  when  it  matures." 

Explain  briefly  what  is  meant  by  the  above  quotation,  indicating  to  a 
bondholder  not  familiar  with  accounting  theory  how  his  interests  are  pro- 
tected. 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

SUMMARY  OF  TRANSACTIONS 

JUNE  1 
The  management  decides  to  change  the  payment  of  wages  and  salaries  from  a 
weekly  to  a  semimonthly  basis.   In  accordance  therewith  the  pay-roll  accrued 
at  May  31  is  paid.  Pay  invoices  of  Specialties  Manufacturing  Co.  $1,202.85 
and  $2,882.50.   Pay  Best  Drop  Forge  Works  their  invoice  of  May  25,  deducting 
the  discount.   The  board  of  directors  declare  a  1.75%  cash  dividend  on  the 
preferred  stock,  and  1%   cash  dividend  on  the  common  stock,  payable  June  5  to 
stockholders  of  record  June  1. 

June  2 
To  enable  the  production  department  to  keep  pace  with  the  sales  and  to 
insure  prompt  deliveries,  the  board  of  directors  authorizes  the  purchase  of 
the  Best  Automobile  Co.'s  plant.   The  balance  sheet  submitted  by  them  is  as 
follows: 

BEST  AUTOMOBILE  CO. 
BALANCE  SHEET,  MAY  31,  1917 


ASSETS 

Land  $15,000.00 

Buildings  20,000.00 

Machinery  60,000.00 

Good-will  75,000.00 
Inventories: 

Raw  Material  4,504.00 

Work  in  Progress  26,300.00 

Finished  Parts  19,050.00 

Automobiles  55,150.00 

Customers'  Accounts  60,285.00 

Notes  Receivable  35,000.00 

Cash  1,450.00 

$371,739.00 


LIABILITIES 
Capital  Stock 
First  Mortgage  6%  Bonds 
Notes  Payable 
Accounts  Payable 
Bond  Interest  Accrued 
Taxes  Accrued 
Pay-roll  Accrued 
Surplus 


$100,000.00 
75,000.00 
67,000.00 
57,985.00 
3,000.00 
1,562.00 
11,542.00 
55,650.00 


$371,739.00 


Copyright*  1917,  The  Ronald  Press  Company 


1-24-3 
After  due  consideration  the  Miller  Motor  Car  Co.  offers  to  purchase  all 
the  assets  except  good-will,  customers'  accounts,  notes  receivable,  and  cash, 
at  the  valuations  given  in  the  balance  sheet  and  to  assume  all  the  liabilities 
except  notes  payable  and  accoiints  payable.   $25,000  is  to  be  paid  in  cash  on 
the  date  of  sale,  the  balance  in  common  stock.   To  complete  the  purchase  the 
stockholders  authorize  an  increase  in  the  common  stock  to  $500,000,  and  839 
shares  are  issued  at  once  to  the  Best  Automobile  Co.  and  recorded  as  fully 
paid. 

Discount  at  City  National  Bank  our  30-day  note  for  $40,000  at  6%.  Pay 
Standard  Wheel  Co.,  and  B.  F.  Goodrich  Co.,  invoices  of  May  23.  Pay  the  ac- 
crued pay-roll  of  the  Best  Automobile  Co. 

JUNE  4 

District  managers'  reports  show  sales  of  $24,758.22  divided  as  follows: 
automobiles  $18,575;  accessories  $6,183.22.  Bank  allowed  $5.04  interest  on 
May  cash  balances. 

JUNE  5 

Collection  report:  cash  $38,753.28;  discount  allowed  $498.28;  notes  re- 
ceived $30,000.   Purchase  additional  furniture  from  Chicago  Furniture  Co. 
$595.00,  net  30  days. 

Issue  checks  to  treasurer  for  the  preferred  stock  dividend  of  $1,750,  and 
the  common  stock  dividend  of  $1,000.  Pay  Automobile  Accessories  Manufacturing 
Co.  invoice  of  May  18  amounting  to  $6,923.50,  deducting  2fo   discount. 

JUNE  6 
Sell  100  shares  of  coimnon  stock  at  par.  Receive  from  notes  receivable 
$16,500,  and  accrued  interest  thereon  $28.78.  Receive  the  following  shipments 
today: 

Specialties  Mfg.  Co.,  Finished  Parts    $6,875.50  terms  July  1 

Stahl  Steel  Works,  Raw  Material         2,933.74   "   1%  10  days,  net  30  days 

Best  Drop  Forge  Works,  Raw  Material      3,387.50   "   2!4%  5  "     "  30  " 

B.  F.  Goodrich  Co.,  Finished  Parts       9,875.00   "   2%  10  "     "  30  " 

Washed  Coal  Co..  Heat.  Light,  and  Power  2,575.28   "   2%  10  "     ■  60  " 

JUNE  7 
Automobile  Accessories  Manufacturing  Co.  refused  to  allow  the  discount  of 
$138.47,  which  we  deducted  from  their  invoice  dated  May  18.   Send  them  check 
for  same.  Also  send  them  check  in  payment  of  their  invoice  of  the  23rd.   Pay 
our  demand  notes  in  favor  of  the  First  National  Bank  for  $3,000  and  $10,000. 
with  accrued  interest  thereon  amounting  to  $51.39. 

JUNE  8 
The  voucher  in  favor  of  Stahl  Steel  Works  for  invoice  of  $2,933.74  entered 
June  6  is  incorrect.   Same  should  be  $2,393.74.   (Cancel  and  issue  a  new  one.) 
Issue  check  favor  cash  for  $2,000  to  be  advanced  to  various  salesmen  on  ac- 
count of  traveling  expenses. 

JUNE  9 
Six  cars  are  returned  by  customers  as  defective.  (Return  sales  book.)  The 
sale  price  thereof  was  $14,875.  Pay  freight  bills  of  Penn.  R.  R.  Co.  $409.97, 
of  which  $129.72  Is  chargeable  to  Finished  Parts  and  $280.25  to  Raw  Material. 

Copyright.  1917,  The  Ronald  Press  Company 


1-24-4 
JUNE  11 
Sales  managers'  reports  show  automobile  sales  of  $63,250,  and  sales  of 
accessories  amounting  to  $11,698.23.  Pay  Best  Drop  Forge  Works  invoice  of 
June  6. 

JUNE  12 
Sundry  parts  sold  prove  to  be  unsatisfactory.   Returns  amounted  to 
$475.27.   Collection  report:  cash  $31,322.98;  discounts  allowed  $523.27;  notes 
received  $32,875. 

JUNE  13 
Received  shipment  of  finished  parts  from  Western  Motor  Castings  Co.  with 
10-day  sight  draft  for  $6,543.50  attached  to  bill  of  lading.  Accept  the 
draft . 

JUNE  14 
District  managers'  reports  show  that  $2,075.28  has  been  allowed  to  custom- 
ers, $1,854.00  on  automobiles  and  $221.28  on  accessories.  Fred  Miller  pur- 
chases a  car  at  $3,500  to  be  charged  to  his  personal  account.   (Sales  book.) 

JUNE  15 
Returned  to  Best  Drop  Forge  Works  defective  forgings  (raw  material) 
amounting  to  $460.50,  less  2^%  discount  which  was  deducted  on  payment  of  in- 
voice. Receive  on  account  of  notes  receivable  $17,575  and  $87.28  accrued  in- 
terest. 


Copyright,  1917,  The  Ronald  Press  Company 


Solution  to  Assignment  1-25-2 

MILLER  MOTOR  CAR  CO 
BALANCE  SHEET,  MAY  31,  19— 


1-24-5 

Exhibit  A 


Cost 


$  25,000.00 
50,000.00 


CAPITAL  ASSETS: 
Land 

Buildings 
Machinery,  Tools, 

and  Equipment       105,603.50 
Office  and  Warehouse 

Fixtures  1,450.00 

Delivery  Equipment      1,750.00 


ASSETS 

Reserve  for 
Depreciation  Present  Value 
$ $  25,000.00 


3183,803.50 


r 


Good-will 

SUBSCRIPTIONS  TO  CAPITAL  STOCK 
CURRENT  ASSETS: 
Inventories: 

Automobiles 

Work  in  Progress 

Raw  Materials 

Finished  Parts 

Miscellaneous  Supplies 

Customers'  Accounts 
Notes  Receivable 


Less — Reserve  for  Bad  Debts 

Cash  in  Bank 
Petty  Cash  Fund 

DEFERRED  CHARGES: 

Unexpired  Insurance 
Rent  Paid  In  Advance 


83.33 

833.33 

7.25 
21.88 

$945.79 


49,916.67 

104,770.17 

1,442.75 
1,728.12 

$182,857.71 

66,000.00 


$248,857.71 
10,000.00 


$  8,218.25 

5,410.17 

1,366.40 

3,724.08 

200.00 

$  18,918.90 

164,997.64 
9,582.62 

$117,889.61 
48,025.00 

$165,914.61 
916.97 

$   9,082.62 
500.00 

193,499.16 

%         843.33 
150.00 

993.33 

$453,350.20 

Copyright,  1917,  The  Ronald  Press  Company 


1-24-6 


LIABILITIES 

CAPITAL  STOCK: 

7%  Preferred  Stock 

$100,000.00 

Common  Stock 

- 

100,000.00 

$200,000.00 

5%  FIRST  MORTGAGE  BONDS 

150,000.00 

CURRENT  LIABILITIES: 

Notes  Payable 

$ 

3,500.00 

Bank  Loan 

13,000.00 

Audited  Vouchers 

70,885.14 

Accrued  Liabilities: 

Interest  on  Notes  Payable      $ 

45.46 

Bond  Interest 

625.00 

Taxes 

447.67 

Pay-roll 

7,581.91 

- 

8,700.04 

96,085.18 

SURPLUS : 

7,265.02 

Profit  for  May  (Exhibit  B) 

CAR  CO. 

$453,350.20 

MILLER  MOTOR 

Exhibit  B 

STATEMENT  OF  PROFITS  AND  INCOME 

MONTH  ENDING  MAY  31,  19— 

- 

FINISHED 

AUTOS 

PARTS 

TOGETHER 

SALES 

$164,065. 

00 

$19,329.75 

$183,394.75 

Deduct — Discount  on  Sales 

914.60 

914.60 

NET  SALES 

$164,065. 

00 

$18,415.15 

$182,480.15 

DEDUCT — Cost  of  Sales,  Exhibits  C  and  D 

121,213. 

96 

14,953.18 

136,167.14 

GROSS  PROFIT  ON  SALES 

$  42,851. 

04 

$  3,461.97 

$  46,313.01 

DEDUCT— SELLING  AND  GENERAL  EXPENSES: 

Selling  Expenses  (Exhibit  E) 

$35,902.91 

General  and  Administrative  Expenses  (I 

Sxhibit  F) 

4,004.59 

39,907.50 

NET  PROFITS  FROM  OPERATION 

$  6,405.51 

ADD—MISCELLANEOUS  INCOME: 

Discount  on  Purchases 

$  1,093.97 

Interest  Received 

150.00 

Consignment  Earnings 

300.00 

1,543.97 

DEDUCT— INTEREST  CHARGES: 

$  7,949.48 

Bond  Interest 

$   625.00 

Other  Interest  Paid 

i   to  Exhibit 

59.46 

684.46 

SURPLUS  NET  PROFITS  (carriec 

A) 

$  7,265.02 

Copyright,  1917,  The  Ronald  Press  Company 


1-24-7 
Exhibit  C 


MILLER  MOTOR  CAR  CO. 
COST  OF  AUTO  SALES 
MONTH  ENDING  MAY  31,  19— 
MATERIALS : 

Raw  Materials: 

Purchases  $10,121.18 

Less — Inventory,  May  31  1,366.40 


Finished  Parts 

DIRECT  LABOR 

FACTORY  EXPENSE: 
Indirect  Labor 
Heat ,  Light ,  and  Power 
Repairs,  Plant,  and  Equipment 
Shop  Supplies 
Depreciation 
Insurance 
Taxes 
Miscellaneous  Factory  Expenses 

TOTAL  MANUFACTURING  COST 

DEDUCT — Inventory  Work  in  Progress,  May  31 

COST  OF  AUTOMOBILES  MANUFACTURED 

ADD — Decrease  in  Inventory  of  Automobiles: 

Inventory,  May  1  (including  Consignment  Returned) 
Inventory,  May  31 

COST  OF  AUTOMOBILES  SOLD  (carried  to  Exhibit  A) 


$  8,754.78 
55,101.55  $63,856.33 
20,394.07 

$  9,057.87 

2,591.85 

3,478.53 

843.75 

916.66 

76.67 

247.67 

178.98   17.391.98 

$101,642.38 

5,410.17 

$96,232.21 

$33,200.00 

8,218.25   24,981.75 


$121,213.96 


Exhibit  D 


MILLER  MOTOR  CAR  CO. 

COST  OF  FINISHED  PARTS  SALES 

MONTH  ENDING  MAY  31,  19— 


INVENTORY  OF  FINISHED  PARTS,  May  1 
PURCHASES 


Less — Finished  Parts  used  in  Production 
Inventory,  May  31 


$  5,890.00 
67,888.81 

$73,778.81 
$55,101.55 

3,724.08   58,825.63 


COST  OF  FINISHED  PARTS  SOLD  (carried  to  Exhibit  B) 


$14,953.18 


Copirright,   1917,   The  Ronald  Press  Company 


MILLER  MOTOR  CAR  CO. 
SELLING  EXPENSES 
MONTH  ENDING  MAY  31,  19- 


Salesmen's  Salaries 

Salesmen's  Traveling  Expenses 

Advertising 

Freight-Out 

Delivery  Equipment  Maintenance 

Depreciation  of  Delivery  Equipment 

Miscellaneous  Selling  Expenses 

Total  (carried  to  Exhibit  B) 


1-24-8 

Exhibit  E 


$  3,358.95 

475.81 

31,882.29 

103.50 

10.48 

21.88 

50.00 

$35,902.91 


Exhibit  F 


MILLER  MOTOR  CAR  CO. 

GENERAL  AND  ADMINISTRATIVE  EXPENSES 

MONTH  ENDING  MAY  31,  19— 

Salaries  of  Officers* 

Office  Salaries 

Depreciation  of  Office  and  Warehouse  Fixtures 

Stationery  and  Printing 

Bad  Debts 

Miscellaneous  General  Expense 

Total  (carried  to  Exhibit  B) 


5  1,800.00 

628.95 

7.25 

590.80 

916.97 

60.62 

$  4,004.59 


Copyright,  1917,  The  Ronald  Press  Company 


1-24^9 
Solution  to  Problem  17 

H.  K.  JEROME  CO. 
ADJUSTED  BALANCE  SHEET,  DECEMBER  31,  1917 

ASSETS 
PLANT  $200,000.00 

DEDUCT — Reserve  for  Depreciation  9,500.00 


$190,500.00 
CURRENT  ASSETS  112,500.00 


$303,000.00 


LIABILITIES  AND  NET  WORTH 

NOTES  PAYABLE  ($20,000.00  Payable  Jan.  1,  1918)  $200,000.00 

CURRENT  LIABILITIES: 

Floating  Debt  20,000.00 


TOTAL  LIABILITIES  $220,000.00 

NET  WORTH: 

Capital  Stock  Issued  and  Outstanding  $200,000.00 

Deduct — Deficiency: 

Surplus  as  per  books  Jan.  1, 

1917  $75,000.00 

Deduct — Net  Loss  incident  to 
abandonment  of  old  plant 
representing  accrued  depre- 
ciation not  provided  for      215,000.00 


Balance,  as  adjusted  $140,000.00 

Surplus  Net  Profits  for  year 

ending  December  31,  1917       23,000.00   117,000.00    83,000.00 


$303,000.00 


It  appears  that  up  to  within  the  last  few  years  the  business  has  not  been 
very  profitable  and  some  part  of  the  dividends  paid,  assuming  that  dividends 
were  paid,  has  been  out  of  capital.   If  no  dividends  have  been  paid,  the  de- 
ficiency is  represented  in  actual  losses  sustained  from  operation. 

Provision  for  accrued  depreciation  of  the  new  plant  for  the  first  year  of 
its  existence  has  been  made  in  the  adjusted  accounts. 


Copyright,  1917,  The  Ronald  Press  Company 


1-24-10 

REDEMPTION  OF  BONDS 

MANNER  OF  REDEMPTION — The  manner  in  which  a  particular  bond  issue  may  be 
redeemed  is  outlined  in  the  trust  deed.   Some  of  the  methods  used  are: 

1.  Redemption  through  payment  of  cash  at  maturity.   It  is  usual  in 

this  case  to  create  a  sinking  fund  for  the  purpose,  as  described 
below. 

2.  Drawing  by  lot  of  bonds  to  be  retired  at  various  periods  set  forth 

in  the  trust  deed.   In  this  case  a  sinking  fund  may  or  may  not  be 
used. 

3.  Redemption  by  serial  payments.   Bonds  here  bear  the  title  of 

"serial  bonds"  and  are  redeemable  at  the  dates  specified  on  their 
face. 

4.  Refunding.   New  bonds  are  exchanged  for  old,  being  given  to  old 

bondholders,  or  new  bonds  are  issued  and  sold  and  proceeds  used 
for  redemption  of  old  bonds. 

5.  Conversion.   Bonds  may  be  designated  "convertible  bonds,"  in  which 

case,  at  the  option  of  the  holder,  they  may  be  converted  into 
some  other  security  of  the  corporation,  usually  stock. 

DISTINCTION  BETWEEN  SINKING  FUND  AND  SINKING  FUND  RESERVE— The  term  FUND 
should  be  applied  ONLY  to  assets,  but  often  refers,  especially  when  used  in 
connection  with  "sinking  fund,"  to  both  a  debit  and  credit  which  appear  on  the 
balance  sheet.   In  the  following  discussion,  "sinking  fund"  will  refer  to  the 
asset,  while  "sinking  fund  reserve"  will  refer  to  the  credit. 

A  SINKING  FUND  is  a  sum  of  money  set  aside,  usually  periodically  and  draw- 
ing interest,  for  the  purpose  of  meeting  a  future  obligation. 

A  SINKING  FUND  RESERVE  is  an  appropriation  of  profits  or  surplus  main- 
tained until  the  obligation,  to  which  it  refers,  has  been  met,  after  which  it 
is  returned  to  Surplus  or  otherwise  disposed  of. 

SINKING  FUND — It  is  evident  that  the  creation  of  either  a  sinking  fund  or 
a  sinking  fund  reserve  serves  to  protect  the  interests  of  the  bondholders. 
Some  trust  deeds  require  the  creation  of  a  fund,  others  the  creation  of  a 
reserve  and  in  some  cases  the  creation  of  both. 

The  trust  deed  often  provides  that  a  certain  sum  of  money  shall  be  turned 
over  to  the  trustee  at  regular  intervals  and  shall  be  invested  by  him  accord- 
ing to  the  terms  of  the  agreement.   The  date  of  the  first  instalment  may  be 
some  time  after  the  issue  of  the  security  in  order  that  the  corporation  may 
first  get  on  its  feet.   Or  an  amount  may  be  paid  the  trustee  based  on  annual 
production. 


Copyright,  1917,  The  Ronald  Press  Company 


1-24-11 
For  example,  twenty-year  bonds  are  issued  January  1,  1915,  to  the  amount 
of  $1,000,000,  the  trust  deed  calling  for  the  payment  by  the  corporation  to 
the  trustee,  of  equal  annual  instalments,  the  total  of  which,  together  with  4% 
compound  interest  allowed  by  the  trustee,  will  amount  to  the  sum  required  for 
redemption  January  1,  1935,  which  will  be  at  par.   By  the  use  of  a  bond  table 
(see  Sprague,  "Accountancy  of  Investment,"  page  354)  the  amount  invested 
yearly  for  twenty  years  which  will  amount  to  |1  at  4%  interest  is  $.03358175. 
The  amount  necessary  to  turn  over  to  the  sinking  fund  trustee  in  the  illustra- 
tion cited  will  therefore  be  $33,581.75. 

-December  31,  1915- 
Sinking  Fund  Trustee  $33,581.75 

To— Cash  $33,581.75 

To  record  payment  of  Instalment  #1  to  trustee. 
See  Section  4  of  trust  deed. 

A  similar  entry  is  made  the  following  year: 

-December  31,  1916- 
Sinking  Fund  Trustee  $33,581.75 

To— Cash  $33,581.75 

To  record  payment  of  Instalment  #2  to  trustee, 
according  to  the  provisions  of  the  trust 
deed.  Section  4. 

On  December  31,  1916,  however,  interest  will  have  accrued  on  the  instal- 
ment of  the  previous  year,  requiring  the  following  entry: 

-December  31,  1916- 
Sinking  Fund  Trustee  $  1,343.27 

To — Income  from  Sinking  Fund  $  1,343.27 

Interest  at  4%  on  instalment  paid  December  31,  1915. 

The  income  from  the  sinking  fund  will  be  added  to  the  current  profits  for  the 
year  and  carried  to  Surplus,  unless  a  sinking  fund  reserve  is  also  maintained, 
in  which  case  the  income  may  be  credited  to  the  reserve,  as  described  below. 
If  the  trustee  is  allowed  or  required  to  use  the  funds  in  his  possession 
to  purchase  portions  of  the  outstanding  issue  for  which  the  fund  has  been 
created,  upon  his  report  to  the  corporation  of  such  purchase,  the  following 
entry  would  be  made: 

-July  5,  1917- 
Bonds  Held  by  Sinking  Fund  Trustee  $20,000.00 

To — Sinking  Fund  Trustee  $20,000.00 

To  record  purchase  of  20  bonds  by  trustee  at 
par,  as  detailed  in  his  report  dated  July 
1,  1917. 

In  case  bonds  are  repurchased  by  the  trustee,  the  corporation  may  or  may 
not  be  required  by  the  trust  deed  to  pay  over  to  the  trustee  the  interest 
accruing  on  the  bonds  held  by  him.   In  either  case  the  net  effect  on  the  cor- 
poration's books  would  be  the  same  since  credit  would  be  taken  at  the  end  of 
the  year,  as  illustrated  above,  for  all  increment  from  the  funds  in  the  hands 
of  the  trustee. 

Copyright,  1917,  The  Ronald  Press  Company 


1-24-12 
If  the  bonds,  when  repurchased  by  the  trustee  are  CANCELLED,  an  entry 
should  be  made  to  record  the  fact  properly: 

-July  5,  1917- 
Bonds  Outstanding  $20,000.00 

To — Bonds  Held  by  Sinking  Fund  Trustee  $20,000.00 

To  record  cancellation  of  20  bonds  acquired 
by  trustee. 

If  the  bonds  are  held  alive  in  the  sinking  fund  and  will  be  sold  again  by  the 
trustee  they  may  be  carried  as  an  asset  on  the  balance  sheet,  for  the  same 
reason  that  treasury  stock  may  be  carried  as  an  asset.   But  if  they  are  not  to 
be  resold,  the  better  practice  would  seem  to  be  to  deduct  them  from  the  au- 
thorized issue,  properly  qualifying  the  deduction,  however,  by  stating  they 
are  in  the  hands  of  the  trustee.   The  purchase  of  bonds  by  the  trustee  may 
affect  the  annual  instalment  and  interest. 

When  the  bonds  are  finally  redeemed,  if  we  suppose  none  were  cancelled  in 
the  meantime,  the  following  entry  is  necessary: 

Bonds  Outstanding  $1,000,000.00 

To — Sinking  Fund  Trustee  $  400,000.00 

Bonds  Held  by  Sinking  Fund 

Trustee  600,000.00 

To  record  redemption  of  bonds  by  pay- 
ment of  cash  to  bondholders  by  trustee  <■ 
£ind  the  surrender  and  cancellation  of 
the  entire  issue.   (It  is  supposed 
that  the  trustee  at  the  time  of  re- 
demption has  acquired  6,000  bonds  of 
the  issue.) 

SINKING  FUND  RESERVE — Many  trust  deeds  require  that  the  sinking  fund  in- 
stalment shall  be  a  charge  "against  eai^nings,"  the  purpose  being  to  prevent 
the  distribution  of  dividends  from  the  yearly  profits  before  the  sinking  fund 
has  been  provided  for.   Nevertheless,  the  periodical  instalment  is  an  APPRO- 
PRIATION OF  PROFITS,  NOT  AN  EXPENSE,  and  on  the  balance  sheet  the  reserve  is 
often  shown  under  the  title  of  "Appropriated  Surplus." 

The  creation  of  a  sinking  fund  reserve  alone  will  not  act  as  a  guarantee  to 
bondholders  that  funds  will  be  available  to  redeem  their  holdings  at  maturity. 
Unless  an  equivalent  amount  of  cash  has  been  set  aside  at  the  same  time,  the 
corporation  may  be  financially  embarrassed  when  the  date  of  redemption  ar- 
rives, for  the  reason  that  the  funds  represented  by  the  reserve,  arising  out 
of  profits,  may  have  been  invested  in  capital  assets  or  in  forms  of  working 
capital  other  than  cash  and  not  readily  convertible  into  cash.   Hence,  the 
provision  for  the  reserve  is  seldom  found  alone. 

Following  the  illustration  already  mentioned,  if  a  sinking  fund  reserve 
were  required  by  the  trust  deed  in  addition  to  the  sinking  fund,  an  additional 
entry  on  December  31,  1915,  would  be  necessary: 

Copyright,  1917,  The  Ronald  Press  Company 


ft 


1-24-13 

-December  31,  1915- 
Profit  and  loss  $33,581.75 

To — Sinking  Fund  Reserve  $33,581.75 

To  set  up  reserve  for  Instalment  #1,  as  per 
the  provisions  in  the  trust  deed.  Section  5. 

The  same  entry  would  again  be  made  on  December  31,  1916,  and  the  following  en- 
try would  record  the  interest  reported  by  the  trustee: 

-December  31,  1916- 
Sinking  Fund  Trustee  $1,343.27 

To — Sinking  Fund  Reserve  $  1,343.27 

Interest  at  4%  earned  on  instalment  paid  Dec- 
cember  31,  1915. 

When  the  bonds  are  redeemed,  the  sinking  fund  reserve  is  available  for  any 
purpose  the  company  may  desire.   Sometimes  a  stock  dividend  is  declared  from 
it ;  in  other  cases  it  is  credited  in  whole  or  part  to  other  reserves  ;  or  the 
amount  may  be  written  back  to  Surplus  (from  which  it  came)  by  the  following 
entry: 

-December  31,  1935- 
Sinking  Fund  Reserve  $1,000,000.00 

To—Surplus  $1,000,000.00 

To  write  back  reserve  to  Surplus  by 
order  of  Board  of  Directors  ;  see 
their  minutes,  page 

In  some  cases  the  trust  deed  provides  that  a  portion  of  the  reserve  may  be 
released  as  the  bonds  are  repurchased  for  cancellation. 

ON  TFffi  BALANCE  SHEET — The  amounts  paid  to  the  sinking  fund  trustee  may  be 
designated  under  the  title  of  "Sinking  Xund"  on  the  balance  sheet,  or  "Sinking 
Fund  Assets,"  and  will  appear  between  capital  and  current  assets. 

The  reserve  will  appear  as  "Sinking  Fund  Reserve"  under  "Appropriated  Sur- 
plus," or  may  be  shown  separately  between  current  liabilities  and  surplus,  or 
under  the  general  heading  of  "Net  Worth." 

A  sinking  fund  may  be  created  also  to  retire  preferred  stock  or  for  other 
purposes.  . 

REFERENCES : 

Bennett,  pages  279-319 

Hatfield,  pages  261-272 

Journal  of  Accountancy,  Vol.  VI,  page  394 


Copyright,  1917,  The  Ronald  Press  Company 


1-25-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  25 

STOCK  AND  BOND  INVESTMENTS 


MISCELLANEOUS  QUESTIONS 
Question  76 — 

(a)  Which  yields  the  larger  income,  6%  stock  at  148%  or  4)^%  stock  at 
112%? 

(b)  What  per  cent  stock  can  be  bought  at  119%,  brokerage  %%  addi- 
tional, to  yield  5%  on  the  investment? 

Question  77 — The  Brightmire  Manufacturing  Co.  has  a  bond  issue  of  $500,000 
maturing  June  1,  1917,  which  has  run  for  fifteen  years.   The  bonds  were  origi- 
nally issued  at  95^  (par  value  $1,000,  interest  at  6%  payable  semiannually) 
and  the  expenses  of  floating  the  issue  amounted  to  $1,530.   Both  a  sinking 
fund  and  sinking  fund  reserve  have  been  maintained,  and  the  bonds  are  to  be 
redeemed  in  cash.   Give  all  the  entries  to  be  made  on  the  books  on  June  1, 
1917,  assuming  that  the  discounts  have  been  kept  correctly. 

Question  78 — P.  J.  Kirkwood  purchased  100  of  the  bonds  described  in  the 
previous  question  on  February  1,  1912,  at  97  and  commission  of  1/6%.   What  en- 
tries in  his  books  relative  to  these  bonds  would  you  expect  to  find  on  or 
shortly  after  June  1,  1917? 

Question  79 — An  Indiana  corporation,  a  holding  company,  owns  three-fourths 
of  the  capital  stock  of  the  Brightmire  Manufacturing  Co.  and  has  taken  up  its 
portion  of  the  profits  of  the  subsidiary  since  the  controlling  interest  was 
secured.   Give  entries  on  the  books  of  the  Indiana  corporation  to  record  the 
following  facts: 

(a)  Profits  of  Brightmire  Manufacturing  Co.  for  year  ending  December 
31,  1916,  $150,000. 

(b)  Dividend  declared  January  5,  1917,  $80,000. 

(c)  Above  dividend  paid  in  cash  January  31,  1917. 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 
SUMMARY  OF  TRANSACTIONS 

JUNE  16 
By  resolution  of  the  board  of  directors,  approved  by  a  meeting  of  stock- 
holders, an  arrangement  is  made  whereby  2,000  shares  of  the  common  stock  of 
the  Miller  Motor  Car  Co.  are  exchanged  for  1,500  shares  (out  of  a  total  issue 
of  2,500  shares)  of  the  capital  stock  of  the  Durant  Truck  Co.   (Debit  to  "In- 
vestments.") Pay  the  bill  of  the  U.  S.  Advertising  Co.  for  May  advertising. 
Pay  B.  P.  Goodrich  Co.  invoice  of  June  6,  and  invoices  of  Stahl  Steel  Works 
and  Washed  Coal  Co. 

Copyright,  1917,  The  Ronald  Press  Company 


1-25-2 


JUNE  18 


Pay  Pay-rolls  to  June  15: 
Factory — Direct  Labor 

Indirect  Labor 

Heat,  Light,  and  Pcver 

Repairs 

Office — Office  Salaries 

Salesmen's  Salaries 


$18,953.25 
9,322.87 
550.75 
1,873.27  $30,700.14 


548.50 
2,943.50   3,492.00 


$34,192.14 


District  sales  managers*  reports  show  sales  of  automobiles  $65,875.00;  ac- 
cessories $9,472.87. 

JUNE  19 
Invoices  are  duly  approved  for  the  following  shipments  received  today: 


Automobile  Accessories  Mfg.  Co., 

Finished  Parts 
Williams  and  Richards,  Shop  Supplies 
New  Idea  Lamp  Co.,  Finished  Parts 
Standard  Wheel  Co. ,  Finished  Parts 
Briscoe  Radiator  Co.,  Finished  Parts 


$18,750.00  terms  2%  15  days,  net  30  days 


683.85  "  2%  15 
2,843.75  "  2%  10 
5,875.00  "  2%  10 
4,227.00  July  1 


30  " 
60  " 
30   " 


Ohio  Steel  Foundries  Co.,  Raw  Material  9,427.25  July  1 

Collection  report  shows  the  following  receipts: 

From  customers — notes  $27,500;  cash  $19,283.26;  discount  allowed 

$782.98. 
From  notes  receivable — $22,135,  and  interest  $103.78. 


JUNE  20 
The  bank  presents  a  three-day  sight  draft  for  $20,000  drawn  by  the  Crown 
Automobile  Co.  for  finished  cars  purchased  May  31.  Accept  the  draft.   Pay 
freight  bills  of  Penn.  R.  R.  Co.  $826.36,  of  which  $714.16  is  chargeable  to 
Finished  Parts,  $112.20  to  Raw  Material.   Edmond  Machinery  Co.  threaten  to  sue 
if  their  note  is  not  paid.   Send  them  check  for  $3,517.01.   Fred  Miller  gives 
his  check  for  the  amount  charged  to  his  personal  account. 


JUNE  21 
Receive  notes  in  full  of  subscription  due  on  common  stock  in  pursuance  to 
call  of  the  board  of  directors. 

JUNE  22 
Receive  from  B.  F.  Goodrich  Co.  finished  parts  $10,483.50,  terms  2%  10 
days,  net  30  days.   Sundry  allowances  to  customers,  on  account  of  finished 
parts,  $1,831.47. 


Copyright,  1917,  The  Ronald  Press  Company 


1-25-3 
JUNE  23 
Pay  our  acceptance  of  the  13th  in  favor  of  Western  Motor  Castings  Co., 
and   our  acceptance  of  the  20th  in  favor  of  the  Crown  Automobile  Co.  Received 
of  Westfield  and  Roe  sundry  repair  parts  for  plant  equipment  $287.25,  C.  0.  D. 
Overhaul  the  truck,  using  finished  parts  from  stock  amounting  to  $77.27. 

JUNE  25 
District  sales  managers'  reports  show  sales  of  automobiles  $58,185;  ac- 
cessories $7,983.78.  Pay  Western  Printing  Co.  invoice  of  May  24;  Williams  and 
Richards  invoice  of  June  19. 

JUNE  26 
Receive  from  the  Quality  Printers  an  invoice  of  $687.50,  terms  1%  10  days, 
net  60  days.   Distribute  as  follows:  Miscellaneous  Factory  Expenses  $107.50; 
Miscellaneous  Selling  Expenses  $86.25;  Stationery  and  Printing  $493.75.   Col- 
lection report  shows  receipts  from  customers  as  follows:  notes  $31,875;  cash 
$20,138.98;  discounts  allowed  $847.27.  Notes  receivable  paid  $15,375,  with 
accrued  interest,  $78.25. 

JUNE  27 
Receive  shipment  from  Washed  Coal  Co.  $5,093.27,  terms  2%  10  days,  net  60 
days,  f.o.b.  factory.   Pay  freight  bills  to  Penn  R.  R.  Co.  $283.27  (Finished 
Parts).   $873.28  of  uncollected  accounts  are  charged  off  (charge  Reserve  for 
Bad  Debts). 

JUNE  28 
Notes  given  in  full  of  common  stock  subscriptions  on  June  21  are  paid. 
Give  August  Miller  check  for  traveling  expenses  to  date,  $743.28.   Receive 
from  Best  Drop  Forge  Works  raw  material  amounting  to  $1,627,  terms  2]^%   5  days, 
net  30  days.   Receive  check  from  National  Fire  Insurance  Co.  for  $383.75  in 
full  settlement  of  damage  caused  by  fire  in  paint  shop  June  3  (Repairs — Plant 
and  Equipment ) . 

JUNE  29 

U.  S.  Advertising  Co.  presented  bill  for  June  advertising,  amounting  to 
$25,647.25.  Pay  same.  Also  pay  the  following  invoices:  New  Idea  Lamp  Co., 
June  19;  Standard  Wheel  Co.,  June  19. 

Sell  400  shares  of  common  stock  at  95,  and  retire  bank  loan  of  $40,000. 
Send  check  of  $600  to  W.  K.  Jones  for  royalties  on  patented  device  used. 


Copyright,  1917,  The  Ronald  Press  Company 
I 


Solution  to  Problem  18 


1-25-4 
Exhibit  A 


THE  VANADIUM  MANUFACTURING  CO. 
BALANCE  SHEET,  DECEMBER  31,  1917 


ASSETS 


CAPITAL  ASSETS: 
Real  Estate 
Buildings 
Machinery  and  Equipment 

Total 

Good-will 
CURRENT  ASSETS: 
Inventories: 

Finished  and  Partly  Finished  Goods 

Raw  Materials 
Accounts  Receivable 
Cash  in  Bank 
Petty  Cash  Fund 


Reserve  for 
Cost    Depreciation 


Book 
Value 


$  30,000.00  $ $  30,000.00 

50,000.00   11,500.00    38,500.00 
175,000.00   52,500.00   122,500.00 


$255,000.00  $64,000.00  $191,000.00 


$25,000.00 

15,000.00 

8,000.00 

14,000.00 

500.00 


50,000.00 


62,500.00 


$303,500.00 


LIABILITIES 
CAPITAL  STOCK  AND  SURPLUS: 

Preferred  Stock — consisting  of  1,200  shares 

of  a  par  value  of  $100  each 
Common  Stock — consisting  of  2,500  shares  without 
par  value  sold  for 

Surplus  applicable  to  Common  Stock: 
Balance,  January  1,  1917 

Profits  for  year  ending  December  31,  1917,  per 
Exhibit  B 


Less — Dividends  declared  December  20,  1917 

Balance — Surplus 

Book  Value  Common  Stock 
CURRENT  LIABILITIES: 
Accounts  Payable 
Dividends  Payable 
Accrued  Taxes 


$125,110.00 

$  23,190.00 

8,800.00 

$  31,990.00 
15,900.00 

$16,090.00 


$24,000.00 

15,900.00 

2,400.00 


$120,000.00 


141,200.00 


42,300.00 
$303,500.00 


Copyright,  1917,  The  Ronald  Press  Company 


THE  VANADIUM  MANUFACTURING  CO. 

STATEMENT  OF  PROFITS  AND  INCOME 

YEAR  ENDING  DECEMBER  31,1917 


1-25-5 

Exhibit  B 


SALES 

Deduct — Cost  of  Sales  (Exhibit  C) 

GROSS  PROFIT  FROM  SALES 
DEDUCT— SELLING  AND  GENERAL  EXPENSES: 
Selling  Expenses: 

Salesmen's  Salaries  and  Commis- 
sions 
Salesmen's  Expenses 
Advertising 

General  Expenses: 

Officers'  Salaries 
Office  Salaries 
General  Expense 

NET  PROFIT  FROM  OPERATIONS 
DEDUCT — Sales  Discounts  Allowed 


$  15,000.00 
3,000.00 
6,000.00  $  24,000.00 


$  25,000.00 

10,000.00 

9,000.00 


44,000.00 


$450,000.00 
371,200.00 

78,800.00 


SURPLUS  NET  PROFITS  (Exhibit  A) 


68,000.00 

$  10,800.00 
2,000.00 

$  8,800.00 


Exhibit  C 


THE  VANADIUM  MANUFACTURING  CO. 

STATEMENT  OF  COST  OF  MANUFACTURE  AND  SALES 

YEAR  ENDING  DECEMBER  31,  1917 


MATERIALS  USED 
DIRECT  LABOR 

PRIME  COST 
FACTORY  OVERHEAD: 

Heat,  Light,  and  Power 

Superintendence 

Maintenance  and  Repairs 

Depreciation 

Taxes 

Miscellaneous  Factory  Expenses 


$247,000.00 
75,000.00 

$322,000.00 


$11,000.00 

10,000.00 

5,000.00 

19,000.00 

2,400.00 

5,800.00 


TOTAL  MANUFACTURING  COST 
DEDUCT — Increase  in  Finished  and  Partly  Finished  Goods: 

December  31,  1917  $25,000.00 

January  1,  1917  21,000.00 


COST  OP  FINISHED  GOODS  SOLD  (Exhibit  B) 


53,200.00 
$375,200.00 


4,000.00 


$371,200.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-25-6 

Comments  on  Problem  18 

The  subject  of  capital  stock  without  par  value  offers  several  interesting 
points  of  discussion. 

1.  There  is  some  tendency  to  think  that  the  amount  received  for  a 

share  of  such  stock  when  the  stock  is  first  marketed  will  fix  a 
sort  of  par  value,  and  when  further  portions  of  the  stock  are 
sold  there  is  a  tendency  to  regard  the  deficiency  or  excess  real- 
ized under  or  over  such  imaginary  par  value  as  a  debit  or  credit 
to  surplus.   (See  article  in  Journal  of  Accountancy,  Vol.  21, 
pages  294-297.) 

2.  Earnings  would  seem  to  be  identified  with  the  capital  account  as  in 

the  case  of  a  partnership,  but  for  various  reasons  the  original 
investment  should  be  kept  separate. 

3.  Under  the  new  excise  tax  law  the  "fair  value"  of  the  capital  stock 

of  a  corporation  is  assessed  with  a  yearly  tax,  thus  reducing  the 
importance  of  the  term  "par  value"  in  the  case  of  all  classes  of 
stock. 


Copyright,  1917,  The  Ronald  Press  Company 


1-25-7 

30ND  PREMIUM  AND  DISCOUNT  , 
NATURE — If  a  corporation  issues  a  bond  having  a  par  value  of  $1,000  for 
$900,  the  bond  is  said  to  be  issued  at  90  and  the  difference  of  |100  is  re- 
ferred to  as  bond  discount.   If  this  bond  were  sold  for  $1,100,  the  excess  of 
$100  would  be  referred  to  as  bond  premium.   In  essence  a  bond  is  merely  a  note 
payable  and  the  treatment  of  the  discount  on  a  bond  should  be  identical  with 
the  treatment  of  discount  on  notes  payable.   The  accepted  rule  is  to  spread 
such  discoimts  over  the  term  of  the  debt  so  as  to  charge  each  accounting  period 
with  its  proportion  of  the  discount.   The  cost  to  the  issuing  company  is  rep- 
resented by  the  effective  rate  of  interest,  i.e.,  the  sum  of  the  nominal 
interest  (interest  paid  at  the  regular  interest  dates)  and  the  proportion  of 
the  bond  discount  charged  off.   Bond  premiums  would  be  dealt  with  likewise, 
each  accounting  period  being  credited  with  its  proportion  of  the  premium. 

BOND  EXPENSE — One  of  the  factors  determining  the  amount  of  discount  is  the 
expenses  connected  with  a  bond  issue,  such  as  attorneys',  engineers',  and 
auditors*  fees,  printing,  etc.   If  paid  by  the  lender,  the  discount  will  natu- 
rally be  higher  than  if  the  expenses  are  paid  by  the  borrower.   Inasmuch  as 
the  latter  method  predominates,  bond  expense  is  generally  added  to  the  bond 
discoiint  and  the  total  amortized  over  the  life  of  the  bonds.   In  this  way  bond 
expense  enters  into  the  effective  interest. 

AMORTIZATION — To  amortize  the  debt  discount  and  expense,  the  simplest  pro- 
cedure is  to  divide  by  the  number  of  years  the  bond  is  to  run.   For  example, 
$100,000  twenty-year  5%  bonds  are  sold  at  95  on  January  1,  1917,  the  expenses 
of  engraving,  commission  on  sales,  etc.,  being  $2,000.   Assuming  the  discount 
and  expense  to  have  been  debited  to  "Bond  Discount  and  Expense,"  the  following 
entries  will  be  made  on  June  30,  1917: 

(1) 
Interest  (a  nominal  account)  $2,500.00 

To — Cash  $2,500.00 

To  record  payment  of  semiannual  interest  in 
cash. 

(2) 
Interest  175.00 

To — Bond  Discount  and  Expense  175.00 

To  write  down  1/40  of  Bond  Discount  and 
Expense. 

Or,  if  the  bonds  are  sold  at  110  (less  the  expenses  of  $2,000),  and  are  re- 
deemable at  par,  entry  (2)  would  be: 

Premium  on  Bonds  $  200.00 

To — Interest  $  200.00 

To  write  down  1/40  of  Premium  on  Bonds. 

The  5%  is  called  the  "nominal"  or  "cash"  rate,  while  the  "effective"  or 
■income"  rate  is  the  one  which  produces  the  correct  charge  to  the  interest  ac- 
count for  the  period.   The  process  of  prorating  discount  or  premium  over  the 
life  of  the  obligation  is  called  "amortization."   The  effective  rate  as  above 
computed  is  not  theoretically  correct  but  is  near  enough  for  ordinary  purposes. 

Copyright,  1917,  The  Ronald  Press  Company 


1-25-8 

STOCK  DISCOUNT  AND  PREMIUM 

NATURE — When  stock  having  a  par  value  of  $100  is  sold  for  $95,  the  differ- 
ence of  $5  is  referred  to  as  "discount."   Conversely,  if  sold  for  $110,  the 
excess  of  $10  is  referred  to  as  "premium."  Many  states  forbid  the  issue  of 
stock  at  less  than  par  on  the  theory  that  the  issue  of  a  certain  amount  of 
stock  will  lead  investors  and  creditors  to  believe  that  assets  equal  to  the 
par  value  have  been  received  by  the  company.   In  Illinois  the  original  issue 
of  stock  cannot  be  sold  at  less  than  par.   In  California  the  issue  of  stock  at 
a  discount  is  sanctioned,  but  stockholders  at  the  same  time  are  held  liable, 
pro  rata,  for  all  debts  of  the  corporation.   In  New  York  stock  may  be  issued 
without  par  value  and  in  such  cases  there  can  be  no  discount  or  premium, 

TREATMENT  ON  BALANCE  SHEET — Stock  discount  is  preferably  shown  separately 
as  a  Deferred  Charge.   Sometimes  it  is  merged  with  organization  expenses  such 
as  incorporation  fees,  prospectus,  legal  fees,  etc.,  and  carried  under  that 
caption  as  a  Deferred  Charge,  or  as  Intangible  Capital.   Premium  on  stock  is 
preferably  shown  under  that  caption  immediately  following  Capital  Stock.  Oft- 
entimes it  is  merged  with  Capital  Surplus. 

DISPOSITION — The  best  practice  is  summed  up  by  the  Interstate  Commerce 
Commission  as  follows:  The  discount  "should  be  carried  on  the  balance  sheet 
until  extinguished  (1)  by  premiums  realized  on  subsequent  sales  of  stock,  (2) 
by  assessments  levied  on  the  stockholders,  (3)  by  appropriations  of  income  or 
free  surplus  for  the  purpose,  or  (4)  by  retiring  the  stock.  When  any  stock  is 
retired,  the  proper  discount  account  should  be  adjusted  by  crediting  to  it  an 
amount  equal  to  the  unextinguished  discount  on  such  stock." 

Stock  discount  or  premium  differs  fundamentally  from  debt  discount  or  pre- 
mium.  The  latter  is  part  of  the  cost  of  money  borrowed  for  a  definite  period 
and  must  be  included  in  determining  the  effective  interest  expense.  The  former 
represents  the  amount  by  which  the  actual  contributions  by  the  proprietors  are 
less  than  or  more  than  the  face  value  of  the  evidences  of  proprietorship 
(stock  certificates)  issued  to  them. 

ENTRIES — Thus,  the  M  N  Company  is  capitalized  at  $100,000,  consisting  of 
1,000  shares  having  a  par  value  of  $100  each,  subscribed  for  at  85.   The  fol- 
lowing entries  are  made: 

Unsubscribed  Stock  $100,000.00 

To— Capital  Stock  Authorized  $100,000.00 

To  record  authorized  issue. 

Subscriptions  85,000.00 

Discount  on  Stock  15,000.00 

To— Unsubscribed  Stock  100,000.00 

The  entire  issue  is  subscribed  for  at  85. 

If,  after' the  first  year,  the  directors  vote  to  write  off  $5,000  of  the  dis- 
count : 

Profit  and  Loss  (or  Surplus)  $  5,000.00 

To— Discount  on  Stock  $  5,000.00 

To  retire  portion  of  the  discount  as  per 
minutes  of  Board  of  Directors,  page 

Copyright,  1917,  The  Ronald  Press  Company 


1-25-9 
If,  in  the  above  illustration,  the  stock  is  sold  at  104,  the  following 
entry  would  be  necessary: 


Subscriptions 

To — Unsubscribed  Stock 
Premium  on  Stock 
Subscriptions  to  entire  issue  at  104. 


$104,000.00 


$100,000.00 
4,000.00 


INVESTMENT  IN  BONDS  OF  OTHER  COMPANIES 

VALUATION — Purchases  of  bonds  of  other  companies  should  be  charged  to  In- 
vestments account  at  cost.   Subsequent  treatment  will  depend  on  whether  it  is 
a  permanent  investment  (to  be  held  indefinitely)  or  a  temporary  investment 
(available  for  sale).   In  the  former  case,  fluctuations  in  the  market  value 
should  be  ignored  except  where  a  drop  in  market  value  appears  to  be  permanent, 
in  which  case  the  conservative  policy  would  be  to  write  it  down.   Temporary 
investments  generally  follow  the  rule  of  cost  or  market  whichever  is  the 
lower.   If  a  temporary  investment  is  a  quoted  security  readily  salable,  it  is 
permissible  in  certain  cases  to  use  market  value,  whether  it  is  more  or  less 
than  cost. 

AMORTIZATION  AND  ACCUMULATION — The  premium  or  discount  on  a  bond  purchased 
is  dealt  with  in  the  same  manner  as  a  premium  or  discount  on  bonds  issued, 
viz.,  amortized  over  the  term  of  the  debt.   In  this  manner  the  true  income  for 
the  period  is  determined.   However,  in  the  case  of  bonds  purchased  it  is  cus- 
tomary to  leave  the  discount  or  premium  in  the  investment  account  instead  of 
segregating  this  element  as  is  done  in  the  case  of  bonds  issued. 

ACCRUED  INTEREST  AT  PURCHASE — Unless  bonds  are  purchased  on  the  dates  in- 
terest collections  are  made,  there  will  always  be  the  purchase  of  accrued  in- 
terest to  consider.   Thus,  two  $1,000  Q%   bonds,  interest  payable  January  1  £ind 
July  1,  are  purchased  May  16  for  $2,040.   Accrued  interest  from  January  1  to 
May  16  will  be: 

43i      6 

X  X  $2,000,  or  $45 

12     100 

indicating  that  the  two  bonds  cost  $1,995  or  99%  each. 

Transactions  with  a  bond  house  will  clearly  show  just  what  portion  of  the 
price  represents  accrued  interest.   The  following  entry  will  be  required  for 
the  transaction  just  stated. 


Investment  (or  other  asset  account) 
Accrued  Interest  on  Investments 
To — Cash 

Purchase  of  two  bonds  No and  .., 

of  the  A  B  Company  at  99?i  and  accrued 
interest. 


$1,995.00 
45.00 


$2,040.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-25-10 
INCOME — Interest  accrues  and  becomes  income  from  day  to  day.  Practically 
it  is  taken  up  on  the  books  at  the  end  of  each  month  or  whenever  financial 
statements  are  prepared.   In  the  former  case  the  following  entry  would  be 
made : 


Accrued  Interest  on  Investments 

To — Income  from  Investments 
To  take  up  accrued  interest  at 


and  when  collected  the  following  entry: 

Cash 

To — Accrued  Interest  on  Investments 


BALANCE  SHEET — Permanent  investments  should  be  shown  between  capital  and 
current  assets  ;  temporary  investments  are  current  assets. 

INVESTMENT  IN  STOCKS  OF  OTHER  COMPANIES 

VALUATION — An  investment  in  the  capital  stock  of  another  company  may  be  a 
(1)  permanent  or  temporary,  or  (2)  a  controlling  interest  (50+%)  or  less  than 
a  controlling  interest. 

All  purchases  of  stock  in  other  companies  should  be  charged  to  an  Invest- 
ment account  at  cost.   If  a  temporary  investment,  the  rule  of  cost  or  market, 
whichever  is  the  lower,  is  most  commonly  applied  although  a  listed  stock  in 
some  cases  may  be  valued  at  market,  irrespective  of  cost.  A  permanent  invest- 
ment is  valued  at  cost.   Should  it  appear  that  a  permanent  fall  in  value  has 
occurred,  conservative  policy  would  require  that  the  book  value  be  reduced. 
In  either  case  the  par  value  may  be  ignored. 

HOLDING  COMPANY — A  holding  company  is  a  corporation  which  controls  other 
companies  through  ownership  of  a  majority  of  the  voting  stock.   In  some  states 
the  statutes  do  not  permit  one  corporation  to  acquire  the  capital  stock  of  an- 
other, thus  preventing  the  formation  of  holding  companies. 

INCOME — Income  from  stock  is  determined  when  a  dividend  is  declared,  at 
which  time  the  following  entry  would  be  made: 


Dividends  Receivable 

To — Income  from  Investments 
Dividend  of  ....%  declared  by  A  B  Company  on 
$....  par  value  of  stock  owned, 

and  when  collected: 

Cash 

.  To — Dividends  Receivable 


Where  the  investment  represents  a  controlling  interest  in  a  subsidiary 
corporation,  the  portion  of  profits  earned  since  the  acquisition  of  the  con- 
trolling interest  and   applicable  thereto,  may  be  taken  up  as  income  on  the 
books  of  the  holding  company  when  the  profits  are  earned,  rather  than  when  the 
dividend  is  declared.   The  entry  would  be: 

Copyright,  1917,  The  Ronald  Press  Company 


1-25-11 

Investment  in  Controlled  Company  $ 

To — Profit  and  Loss  % 

To  take  up  75%  of  profits  of  X  Y  Company,  for 
year  ending  as  per  their  State- 
ment of  Profit  and  Income. 

and  when  the  dividend  is  collected: 

Cash  S 


To — Investment  in  Controlled  Company  J. 


\ 


This  procedure  is  based  on  the  theory  that  all  the  surplus  of  a  subsidiary 
is  controlled  by  the  holding  company  and  may  be  distributed  at  will  and  hence 
should  appear  on  the  books  of  the  holding  company  as  soon  as  determined. 

BALANCE  SHEET — Permainent  investments  should  appear  between  capital  and 
current  assets,  investments  in  controlled  companies  appearing  as  a  separate 
item.   Temporary  investments  are  usually  classed  as  current  assets. 

REFERENCES : 

Bennett,  pages  252-278 

Cole,  Chapter  XII 

Esquerre,  pages  261-291 

Sprague,  "Accountancy  of  Investment" 


Copyright,  1917,  The  Ronald  Press  Company 


1-26-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  26 

CAPITAL  AND  REVENUE  EXPENDITURES 


Problem  20 

In  your  examination  of  the  Automobile  Delivery  Truck  account  of  a  company, 
you  find  the  following  entries: 

DEBITS 
Jan.  1,  1917,  Trucks  1,  2,  3,  4,  at  $1,200  $4,800.00 

July  1,  1917,  Truck  5  1,500.00 

Aug.  1,  1917,  Truck  6  1,500.00 

CREDITS 
Aug.   1,  1917,  Truck  2  $  900.00 

Sept.  1,  1917,  Truck  4  750.00 

Balance,  September  1,  1917  $6,150.00 

The  Reserve  for  Depreciation  of  Automobile  Delivery  Truck  account  stood 
credited  on  January  1,  1917,  with  $1,800. 

Upon  ginalyzing  the  transactions  represented  by  these  items,  you  find  the 
following  facts: 

1.  Truck  5  purchased  July  1  replaced  Truck  1.   The  portion  of  the  reserve 
for  depreciation  accumulated  on  January  1  for  Truck  1  amounted  to  $900.   Truck 
5  was  purchased  on  open  account. 

2.  Truck  2  was  traded  in  for  $850  on  the  purchase  of  Truck  6  costing 
$1,500.   The  difference  was  paid  in  cash.   The  reserve  which  had  been  accumra- 
lated  for  depreciation  on  Truck  2  on  January  1,  amounted  to  $300. 

3.  Truck  4  was  totally  destroyed  in  an  accident  September  1.   The  reserve 
for  depreciation  on  this  truck  amounted  on  January  1  to  $300  and  it  was  in- 
sured for  $750. 

Assume  the  rate  of  depreciation  to  be  25%  per  year. 

Give  journal  entries  which  would  properly  record  the  above  facts  and  show 
the  balances  of  all  accounts  affected,  as  of  September  1,  1917. 

MISCELLANEOUS  QUESTIONS 

Question  80 — A  corporation  manufacturing  explosives  was  compelled  to  pay 
exorbitant  rates  for  a  very  limited  amount  of  insurance,  and  in  consequence 
was  obliged  to  install  an  automatic  sprinkler  system  at  a  cost  of  $75,000. 
This  additional  fire  protection  enabled  it  to  secure  a  full  line  of  insurance, 
though  in  mutual  companies,  and  at  a  much  lower  rate  than  was  obtainable  prior 
to  such  installation.   At  the  end  of  the  fiscal  year  the  company  received 
dividends  from  these  mutual  insurance  companies,  aggregating  $2,000.   To  what 
account  should  the  cost  of  the  sprinkler  system  be  charged  and  to  what  account 
should  this  dividend  be  credited?   State  your  reasons  fully. 

Copyright,  1917,  The  Ronald  Press  Company 


1-26-2 
Question  81 — Should  the  following  expenditures  be  charged  to  capital  or  to 
revenue : 

(a)  Repairs  to  machinery, 

(b)  Replacements  of  machinery  and  plant. 

(c)  Royalties  on  machines  used  but  owned  by  outside  parties. 

(d)  Brokerage  on  a  piece  of  property  purchased. 

(e)  Costs  attending  a  mortgage  given. 

(f)  Costs  of  patents,  including  lawyer's  charges  and  government  fee. 

(g)  Expenses  of  incorporation. 

Give  reasons  for  your  answer  in  each  case. 

WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

SUMMARY  OF  TRANSACTIONS 

JUNE  30 
District  managers'  reports  show  sales  of  cars  $40,875,  and  accessories 
$4,328.25.   Collection  report  to  date  shows  cash  received  from  customers 
$16,483.25;  discount  allowed  $538.71;  notes  received  $28,750.   Received  on 
notes  $11,437,  and  for  accrued  interest,  $98.38.   Gave  petty  cashier  check  for 
following  petty  cash  disbursements:  heat,  light,  and  power  $157.25;  miscel- 
laneous manufacturing  expenses  $48.27;  traveling  expenses  $93.72;  miscellane- 
ous selling  expenses  $67.20;  office  salaries  $122;  total  $488.44.   Received 
$29.43  from  an  account  receivable  charged  off  June  27. 

Depreciation  of  Buildings — 2%  per  annum  (including  purchase  of  June  2) 
"       "  Machinery — 10%  «    «        "        w     n   n   w 
"       "  Delivery  Equipment — 15%  per  annum 

■       "  Office  and  Warehouse  Fixtures — 6%  per  annum  (including  pur- 
chase of  Jiine  2) 

Reserve  for  Bad  Debts — y-0o   of  Gross  Sales 

Taxes  Accrued  285.67 

Bond  Interest  Accrued 

Rent  Paid  in  Advance 

Insurance  Expired  76.67 

Accrued  Interest  on  Notes  Receivable  315.92 

Prepaid  Interest  on  Bank  Loan 

Provide  a  Reserve  for  Discounts  to  be  taken  by  customers  1,800.00 

Inventory  of  Coal  3,500.00 

Stationery  100.00 

Accrued  pay-roll  to  date: 


Factory: 

Direct  Labor 

Indirect  Labor 

Heat,  Light,  and  Power 

Repairs — Plant  and  Equipment 

Motor  Truck  Maintenance 


$20,948.73 

11,848.27 

583.20 

1,532.83 

31.27 


$34,944.30 


Copyright,  1917,  The  Ronald  Press  Company 


Office: 

Salesmen's  Salaries 
Officers*  Salaries 
Office  Salaries 


1-26-3 
$  3,547.50 
2,500.00 

657.75    6,705.25 


$41 » 649. 55 


Prepare : 

(a)  A  trial  balance  of  general  ledger  as  of  June  30,  19 — 

(b)  Schedule  of  unpaid  audited  vouchers. 

Solution  to  Problem  19 

(Entry  already  made) 
-April  1,  1917- 
Cash  in  Sinking  Fund  $10,000.00 

To— Cash  $10,000.00 

Recording  payment  of  instalment  No.  8. 

-April  1,  1917- 

(1) 
Cash  in  Sinking  Fund  1,250.00 

To — Sinking  Fund  Reserve  (Income  from 

Sinking  Fund)  1,250.00 

Coupons  collected  by  trustee  on  X  Y  Company 
5%   bonds. 

-May  1,  1917- 
(2) 
Cash  in  Sinking  Fund        "  450.00 

To — Sinking  Fund  Reserve  (Income  from 

Sinking  Fund)  450.00 

Coupons  collected  by  trustee  on  A  B  Company 
Q%   bonds. 

(3) 
Cash  in  Sinking  Fund  15,600.00 

To — Securities  in  Sinking  Fund  (Bonds  of 

A  B  Company)  15,000.00 

Sinking  Fund  Reserve  600.00 

Bonds  of  A  B  Company  held  by  trustee  sold  at 
104,  book  value  $15,000. 

(4) 
Securities  in  Sinking  Fund  (Bonds  of  X  Y  Com- 
pany) 36,000.00 
Accrued  Interest  on  Sinking  Fund  Investments        150.00 

To— Cash  in  Sinking  Fund  36,150.00 

36  X  Y  Company  5%  bonds  purchased  by  trustee 
at  par  and  accrued  interest. 


Copyright,  1917,  The  Ronald  Press  Company 


1-26-4 
(5) 
Sinking  Fund  Reserve  (Expenses  of  Sinking  Fund)    $250.00 

To — Cash  in  Sinking  Fund  $250.00 

Commission  paid  by  trustee  on  purchase  and 
sale  of  bonds. 

-June  30,  1917- 
(6) 
Cash  in  Sinking  Fund  240.00 

To — Sinking  Fund  Reserve  (Income  from 

Sinking  Fund)  240.00 

Interest  on  cash  balances  allowed  by  trustee 
for  six  months  ending  today. 

(7) 
Sinking  Fund  Reserve  (Expenses  of  Sinking  Fund)      50.00 

To — Cash  in  Sinking  Fund  50.00 

Expenses  of  trustee  paid  as  per  his  report. 

The  accounts  appearing  in  parentheses  are  the  ones  which  would  be  used  in 
case  there  was  no  sinking  fund  reserve. 

On  June  30,  1917,  the  sinking  fund  assets  would  appear  as  follows  on  the 
balance  sheet : 

Bonds  of  X  Y  Company  $86,000.00 

Accrued  Interest  paid  on  above  150.00 

Cash  1,190.00 


$87,340.00 


ANSWERS  TO  QUESTIONS 

Answer  to  Question  74 — The  entries  in  either  case  are  the  same,  all  income 
being  credited  to  an  "Income  from  Sinking  Fund"  or  similar  account,  and  all 
expenses  being  debited  either  to  the  income  account  or  to  a  separate  Expenses 
of  Sinking  Fund  account,  as  in  the  solution  to  Problem  19.   Or  if  a  sinking 
fund  reserve  is  maintained,  the  income  and  expense  will  be  carried  and  deb- 
ited, respectively,  thereto. 

Answer  to  Question  75 — The  theory  of  the  sinking  fund  reserve  rests  on  the 
assumption  that  the  amount  of  profits  withheld  in  the  business  by  setting  up 
the  reserve  will  increase  the  assets  and  at  the  same  time  prevent  such  addi- 
tional assets  from  being  withdrawn  by  stockholders  as  dividends.   Without  an 
accompanying  provision  for  the  creation  of  "Sinking  Fund  Assets,"  it  may 
happen  that  the  funds  represented  by  the  reserve  will  be  invested  in  addi- 
tional capital  assets  or  perhaps  will  be  squandered,  in  either  case  no  liquid 
funds  being  found  on  hand  when  the  bonds  are  to  be  redeemed.   Hence,  while  the 
reserve  generally  operates  to  protect  the  investor  so  far  as  the  value  of  the 
underlying  security  is  concerned,  it  does  not  assure  him  that  funds  will  be  on 
hand  to  pay  the  obligation  at  maturity. 

Copyright,  1917,  The  Ronald  Press  Company 


1-26-5 

CAPITAL  AND  REVENUE  EXPENDITURES 

DEFINITION — "Capital  and  Revenue  Expenditures"  has  reference  to  the  ques- 
tion— "Shall  certain  expenditures  be  treated  as  additions  to  capital  assets  or 
as  operating  expenses  or  otherwise?"   The  term  is  usually  exclusive  of  ex- 
penditures other  than  those  relating  to  capital  assets. 

NATURE  OF  PROBLEM — A  building  is  erected,  its  cost  included  with  other 
capital  assets,  and  for  a  number  of  years  is  used  for  the  purposes  of  the 
business  for  which  it  has  been  constructed.   During  that  time  a  reserve  for 
depreciation,  based  on  a  fifty-year  life,  has  been  accumulating,  and  all  or- 
dinary repairs,  such  as  repainting,  redecorating,  replacing  window-panes, 
etc.,  have  been  charged  to  an  appropriate  expense  account  and  closed  into 
Profit  and  Loss  at  the  end  of  each  year.   Of  ordinary  repairs  such  as  these 
there  has  been  no  question.   None  have  added  any  value  to  the  property  and 
they  have  been  treated  properly  as  operating  expenses. 

But  supposing  expenditures  out  of  the  ordinary  are  incurred?  A  wall  is 
torn  down  to  make  way  for  a  new  addition.   Foundations  are  strengthened  and 
considerable  interior  alterations  are  made  necessary  by  installing  new  machin- 
ery.  Machines  already  installed  are  shifted  from  one  part  of  the  building  to 
another. 

Some  of  the  accounts  to  which  these  and  other  expenditures  having  to  do 
with  the  extension  or  maintenance  of  capital  assets  may  be  charged  are: 

1.  Capital  Asset  Accounts 

2.  Reserves  for  Depreciation 

3.  Operating  Expenses 

4.  Surplus 

1.  PROPERTY  ACCOUNTS — The  discussion  here  is  concerned  with  (a)  property 
purchased  and  (b)  property  constructed  by  the  business  itself. 

(a)  PURCHASED  PROPERTY.   To  the  contract  or  invoice  price  which  is  charge- 
able to  the  capital  asset  account  it  is  proper  to  add  the  costs  of  installa- 
tion, such  as  freight-in,  handling  charges,  and  all  other  costs  incurred 
before  the  asset  is  ready  for  use.   Trade  discounts,  cash  discounts,  rebates 
and  allowances  should  be  deducted. 

Sometimes  assets  are  purchased  in  a  depleted  or  worn-out  condition.   In 
this  case  the  costs  of  bringing  them  to  a  state  of  normal  efficiency  are  capi- 
tal expenditures  since  more  would  have  been  paid  for  the  assets  had  they  been 
in  a  state  of  proper  repair, 

(b)  PROPERTY  CONSTRUCTED  BY  THE  BUSINESS  ITSELF.   There  are  various 
methods  in  use  for  arriving  at  the  cost  of  property  constructed.   One  is  that 
only  materials  used  and  direct  labor  expended  (prime  cost)  are  proper  charges 
to  construction.   A  second  method  often  followed  is  to  include  as  overhead  (in 
addition  to  prime  cost)  those  costs  which  will  not  continue  after  construction 
ceases  and  which  have  been  incurred  because  of  construction.   In  still  other 
cases  arbitrary  percentages  are  added  to  the  prime  cost  to  cover  manufacturing 
overhead  and  administrative  expenses.   A  fourth  method  consists  in  charging  to 
the  asset  account  the  market  price  if  obtained  from  outsiders. 

Copyright,  1917,  The  Ronald  Press  Company 


1-26-6 
A  rule  supported  most  generally  by  accountants  stands  midway  between  the 
second  and  third  methods  outlined:  to  include  materials  and  labor  directly 
assignable  to  construction  and  that  portion  of  overhead  which  represents  cost 
actually  applicable,  whether  composed  of  non-recurring  charges  or  of  regular 
overhead  and  administrative  expenses.   In  the  latter  charge  one  might  expect 
to  find  superintendence,  engineering,  part  of  the  costs  of  the  purchasing  and 
receiving  departments,  and  even  interest.   Charges  for  interest  are  generally 
limited  to  amounts  actually  paid  or  accrued  during  the  period  of  construction, 
such  as  interest  on  bonds  and  interest  on  temporary  borrowings  for  capital 
pi^rposes. 

Expenditures  incurred  on  capital  assets  serving  to  increase  the  capacity 
of  their  output  are  usually  additions  to  property  accounts.   But  these  expen- 
ditures to  become  capital  charges  must  be  made  on  assets  which  are  otherwise 
operating  efficiently;  that  is,  they  must  not  represent  neglected  repairs 
which  of  course  might  also  result  in  an  increased  capacity  of  output  as  com- 
pared with  the  asset  when  in  bad  repair.  Nor  would  expenditures  the  object  of 
which  is  to  lower  the  cost  of  output  necessarily  imply  that  value  was  being 
added  to  the  property;  the  test  would  be,  "Are  there  any  additions  or  exten- 
sions to  the  normally  functioning  asset  because  of  the  expenditure?" 

2.  RESERVES  FOR  DEPRECIATION — Charges  to  depreciation  reserves  will  in 
most  cases  be  confined  to  the  costs  of  old  assets  discarded  or  sold.  Extraor- 
dinary repairs  the  result  of  which  is  to  lengthen  the  life  of  the  asset  may  as 
a  rule  be  charged  to  the  depreciation  reserve,  the  effect  being  to  extend  the 
time  during  which  depreciation  is  provided.  Extraordinary  expenses  or  repairs 
should  not  include  amounts  which  represent  delayed,  deferred,  or  neglected  re- 
pairs, since  the  latter  are  chargeable  to  past  operations,  not  to  the  reserve. 

3.  OPERATING  EXPENSES — All  recurrent  and  ordinary  expenses  necessary  to 
maintain  an  asset  in  a  proper  state  of  efficiency  are  classed  as  operating 
expenses. 

REPAIRS  AND  RENEWALS  is  often  the  name  of  an  account  purely  nominal  in 
character,  "renewals"  referring  to  small  or  frequent  replacements  of  integral 
parts  of  a  single  asset  such  as  a  machine.   Thus,  while  the  life  of  a  certain 
printing  press  is  ten  or  fifteen  years,  certain  rollers  and  bearings  must  be 
replaced  repeatedly  at  the  end  of  every  six  or  eight  months.   Renewals  of 
small  parts  is  in  most  cases  treated  as  an  expense  and  should  not  be  confused 
with  the  renewal  of  the  whole  asset  or  a  substantial  part  of  the  asset. 

Frequently  renewals  of  assets  such  as  SMALL  TOOLS  are  debited  at  once  to 
expense  accounts,  leaving  the  asset  account  at  its  original  figure,  undepre- 
ciated.  This  method  is  to  be  recommended  where  the  entire  asset  or  most  of  it 
has  a  life  of  a  year  or  less.   In  order  that  the  book  value  of  the  asset  may 
be  neither  too  high  nor  too  low,  a  periodical  physical  revaluation  is  provided 
for  and  an  adjustment  made  between  the  asset  and  nominal  account  to  bring  the 
former  into  agreement  with  the  inventory  figure. 

Other  methods  of  handling  capital  and  revenue  expenditures  are  illustrated 
in  the  various  treatments  of  additions  to  furniture  and  fixtures  which  may  be 
found  in  practice.   Besides  the  usual  treatment  accorded  other  capital  assets 
may  be  mentioned: 


Copyright,  1917,  The  Ronald  Press  Company 


1-26-7 

(a)  The  inventory  method  as  in  the  case  of  Small  Tools,  Delivery 

Equipment,  etc. 

(b)  Writing  off  a  larger  amount  for  depreciation  than  is  necessary. 

(c)  Closing  out  the  original  asset  account  by  means  of  a  reserve  for 

depreciation  or  by  charging  it  off  directly  to  Profit  and  Loss 
and  treating  subsequent  additions  as  expenses. 

(d)  Maintaining  the  original  cost  as  an  asset  and  writing  off  subse- 

quent additions  to  Profit  and  Loss. 

The  error  resulting  from  an  application  of  these  methods  tends  to  be  on  the 
side  of  conservatism  and  a  "secret  reserve"  may  be  created  (the  financial 
position  of  the  business  understated  by  the  balance  sheet). 

4.  SURPLUS — Charges  to  Surplus  on  account  of  capital  assets  would  consist 
chiefly  of  neglected  repair  and  maintenance  charges  and  losses  actually  sus- 
tained in  previous  years  but  not  written  off  until  after  the  close  of  the 
period.   An  extraordinary  loss,  such  as  a  fire  loss,  might  also  be  charged  to 
Surplus  without  first  appearing  in  Profit  and  Loss.   In  some  cases  it  may  be 
necessary  to  make  a  finer  differentiation  of  expenditures  than  above  indi- 
cated, and  Improvement  Reserves,  Deferred  Charges,  or  Extraordinary  Charges  to 
Profit  and  Loss  may  be  used  for  that  purpose. 

REFERENCES : 

Dickinson,  Chapter  VII 
Esquerre,  pages  226-230 


Copyright,  1917,  The  Ronald  Press  Company 


1-27-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  27 
GOOD-WILL,  PATENTS,  COPYRIGHTS,  AND  TRADE-MARKS 


GENERAL  REVIEW  QUESTIONS 

Problem  21  (For  General  Review) 

The  Jones  Lithographing  Co.  commenced  the  year  1917  with  the  following 
balance  sheet: 

JONES  LITHOGRAPHING  CO. 
BALANCE  SHEET,  JANUARY  1,  1917 

ASSETS 
CURRENT  ASSETS: 

Cash  $  4,000.00 

Accounts  Receivable  59,500.00 

Personal  Accounts  10,100.00 

Inventories: 

Raw  Materials  12,500.00 

Work  in  Progress  3,100.00 

General  Expense  (Office  Supplies,  Postage, 

etc.)  500.00  $   89,700.00 


DEFERRED  CHARGES: 

Discount  on  Stock  $  15,300.00 
Prepaid  Commissions  to  Salesmen  9,670.00 

Working  Fund  5,000.00 

Prepaid  Insurance  1,030.00      31,000.00 


CAPITAL  ASSETS: 

Land  |  45,000.00 

Buildings  259,000.00 

Machinery  240,000.00 

Fixtures: 

Factory  $160,000.00 

Gen.  Office  6,000.00   166,000.00 


Investment  in  X  Printing  Co.  350,000.00   1,060,000.00 


$1,180,700.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-27-2 
LIABILITIES 

CURRENT  LIABILITIES: 

Accounts  Payable  $  16,400.00 

Notes  Payable  4,000.00    . 

Bank  Loan  5,000.00 

Accrued  Bond  Int.  8,000.00 

Accrued  Taxes  3,000.00  $   36,400.00 


FIRST  MORTGAGE  20-YEAR  4%  BONDS  (due  Jan.  1,  1921): 

Issued  and  Outstanding  400,000.00 

RESERVES  FOR  DEPRECIATION: 

Buildings  $  56,000.00 

Machinery  72,000.00 

Fixtures  40,000.00     168,000.00 

OTHER  RESERVES:  '  

Sinking  Fund  Reserve  $320,000.00 

Bad  Debt  Reserve  2,000.00     322,000.00 


CAPITAL  STOCK: 

Issued  and  Outstanding  $500,000.00 

Deficit,  Jan.  1,  1917  245,700.00     254,300.00 


$1,180,700.00 


Personal  accounts  on  January  1,  1917,  were: 

D.  R.  Jones,  President — Drawing  Account  $  6,650.00 

W.  R.  Single,  Vice-President — Drawing  Account        3,450.00 


$10,100.00 


"Investment  in  X  Printing  Co."  is  the  cost  of  3,000  shares  (out  of  a  total 
issue  of  5,000  shares)  which  were  acquired  in  1911  by  the  present  owners 
through  exchange  of  one  share  of  X  Printing  Co.  stock  for  every  1  1/6  shares 
of  Jones  Lithographing  Co.  stock.  Accounts  payable  at  January  1  were  on  ac- 
count of  raw  material  purchases  $9,500;  heat,  light,  and  power,  $5,900;  and 
general  expense  $1,000. 

Cash  receipts  and  disbursements  during  the  year  1917  have  been  summarized 
as  follows: 

RECEIPTS 
Customers  on  Account  $  831,000.00 

Notes  Payable  10,000.00 

Bank  Loans  75,000.00 

Cash  Sales  102,000.00 

Sale  of  Machinery  Scrapped  in  1917  (cost  $5,000, 

reserve  provided  $3,800)  1,200.00 

Dividend  on  X  Printing  Co.  Stock  7,000.00 

Refund  from  Barr  Chemical  Co.  (paid  bill  twice  to 

them  for  purchase  of  raw  materials)  150.00 


TOTAL  RECEIPTS  $1,026,350.00 

Copyright,  1917,  The  Ronald  Press  Company 


1-27-3 


DISBURSEMENTS 
Accounts  Payable: 

Raw  Material  Purchases 

Manufacturing  Supplies 

Heat,  Light,  and  Power 

Additions  to  Buildings 

New  Machinery  Purchases  (replacing  old  ma- 
chinery scrapped  costing  $10,000;  reserve 
provided  $10,000.   This  item  is  not  related 
to  the  one  appearing  above.) 

Extraordinary  Repairs  on  Fixtures  (Factory) 

Prepaid  Insurance 
Direct  Labor 
Indirect  Labor 

General  and  Administrative  Expense 
Prepaid  Commissions  to  Salesmen 
Commissions  to  Salesmen 
Notes  Payable 
1916  Taxes 
Bank  Loans 
Bond  Interest 

D.  R.  Jones — Drawing  Account 
W.  R.  Single — Drawing  Account 
Sundry  Manufacturing  Expenses 

BALANCE  ON  HAND,  December  31,  1917 


575,000.00 

8,500.00 

15,100.00 

92,300.00 


11,500.00 

2,500.00 

1,950.00 

125,000.00 

11,000.00 

15,400.00 

21,600.00 

10,200.00 

12,000.00 

3,000.00 

70,000.00 

16,000.00 

10,000.00 

8,000.00 

14,150.00 


$1,023,200.00 


7,150.00 


Sales  during  the  year  charged  to  customers  totalled  $840,000;  allowances 
during  the  year  on  the  gross  amount  were  $8,450;  cash  discounts  allowed  cus- 
tomers $2,400;  accounts  proving  worthless  and  charged  to  reserve  during  1917, 
$1,100;  total  accounts  outstanding  which  are  regarded  as  uncollectible  at  De- 
cember 31,  1917,  $2,250. 

Credit  to  D.  R.  Jones,  president  and  general  manager,  on  account  of  salary 
for  1917,  $12,000;  credit  to  W.  R.  Single,  vice-president  and  general  superin- 
tendent of  manufacturing  operations  (chargeable  as  factory  burden),  $6,000. 

Inventory  of  raw  materials  at  December  31,  1917,  $9,800;  of  work  in  pro- 
gress, $4,500;  of  postage,  $500.  All  work  being  done  on  a  contract  basis, 
there  is  no  finished  stock. 

In  view  of  the  profits  earned  during  the  year,  the  directors  vote  to  write 
off  $5,000  of  the  discount  on  stock.  Prepaid  commissions  to  salesmen  at  De- 
cember 31,  1917,  are  $8,140;  prepaid  insurance  $1,110;  the  president  reports 
that  while  on  January  1,  1917,  he  had  the  $5,000  working  fund  on  hand,  at  De- 
cember 31  but  $1,000  remains,  the  difference  being  chargeable  to  Promotion 
(Selling)  Expense. 

Accoimts  payable  December  31,  1917,  are  $5,100  for  raw  material  purchases, 
and  general  expense  items  $900;  total  $6,000. 

Provide  as  follows  for  depreciation,  using  as  a  basis  the  balances  of  the 
ledger  accounts  at  cost  at  December  31,  1917:  buildings  5%;   machinery  10%; 
fixtures  15%, 


Copyright,  1917,  The  Ronald  Press  Company 


1-27-4 
Accrued  taxes  at  December  31,  1917,  consist  of  the  following: 

Property  Taxes  $945.00 

Income  Tax  and  Capital  Stock  Tax  (estimated)  $962.30 

The  regular  increment  to  the  sinking  fund  reserve  should  be  made. 
From  the  information  above  prepare: 

(a)  Balance  sheet  at  December  31,  1917. 

(b)  Statement  of  profit  and  loss  for  year  ending  that  date. 

The  balance  sheet  may  be  rearranged  in  any  way. 

GENERAL  REVIEW  QUESTIONS 

Question  82 — Give  the  procedure  to  be  followed  when  attempting  to  ascer- 
tain the  amount  of  profit  or  loss  of  an  enterprise  whose  accounts  have  been 
kept  on  the  single-entry  basis. 

Question  83 — Wherein  do  trial  balances  and  balance  sheets  differ? 

Question  84— What  is  the  purpose  of  grouping  assets  and  liabilities,  so  as 
to  show  the  separate  totals  of  the  fixed  and  current  assets  and  liabilities 
when  preparing  balance  sheets? 

Question  85 — Differentiate  between  capital  and  revenue  expenditures.   Il- 
lustrate. 

Question  86 — Differentiate  between  the  following  terms — expenditure,  dis- 
bursements, expense,  receipts,  income. 

Question  87 — Should  goods,  which  have  been  sent  out  on  consignment,  be 
credited  to  sales  account  and  charged  to  the  consignee  when  recording  such 
consignment  on  the  books?  Give  reasons  for  your  answer. 

Question  88 — Outline  a  method  of  handling  consignments-outward  involving 
the  use  of  a  subsidiary  consignments-outward  ledger. 

Question  89 — Outline  a  method  of  handling  consignments-inward  involving 
the  use  of  a  subsidiary  consignments- inward  ledger. 

Question  90 — What  is  a  joint  venture?  Describe  a  simple  method  of  ac- 
counting for  a  venture  between  A,  B,  and  C,  A  acting  as  the  manager  of  the 
venture,  B  advancing  the  merchandise  shipped,  and  C  collecting  the  proceeds, 

Questi-on  91 — Describe  briefly  two  ways  of  accounting  for  accruing  income 
and  expense,  using  as  an  illustration  interest  accrued  or  notes  payable. 

Question  92 — What  is  the  underlying  reason  for  excluding  from  merchandise 
inventory  valuations  the  increase  in  market  value  over  cost  price  of  goods  on 
hand  in  those  cases  where,  if  the  market  value  is  less  than  the  cost  price, 
the  loss  is  taken  into  account? 

Copyright,  1917,  The  Ronald  Press  Company 


1-27-5 

Question  93 — Name  two  advantages  derived  from  the  method  of  keeping  a 
separate  cash  fund  out  of  which  all  petty  expenses  are  paid  with  currency. 

Question  94 — What  advantage  is  derived  from  the  practice  of  entering  cash 
sales  daily  in  the  sales  journal  and  charging  the  cash  received  to  a  cash 
sales  or  cashier's  account  in  the  customers  ledger,  instead  of  simply  credit- 
ing such  sales  direct  from  the  cash  book  to  the  Sales  account? 

Question  95 — Name  and  describe  the  chief  partnership  accounts  not  common 
to  a  corporation. 

Question  96 — By  and  under  what  authority  does  a  corporation  operate? 

Question  97 — Differentiate  between  treasury  stock  and  unissued  stock. 

Question  98 — How  would  you  dispose  of  the  difference  between  par  value  and 
selling  price,  where  treasury  stock  is  sold  for  less  than  par?  Where  treasury 
bonds  are  sold  for  less  than  par. 

Question  99 — On  the  balance  sheet  of  the  X  Y  Z  Company,  among  the  items 
under  the  heading  of  "Liabilities"  appeared  the  following: 

1 — 6%  Preferred  Capital  Stock  $200,000.00 

2 — First  Mortgage  6%  Gold  Bonds  200,000.00 

What  difference,  if  any,  is  there  between  these  two  liabilities,  assuming 
the  stock  is  preferred  both  as  to  dividends  and  assets? 

Question  100 — What  difference  is  there  in  the  nature  of  security  for  the 
following  kinds  of  bonds:  First  Mortgage;  Income;  Municipal? 

Question  101 — Assuming  that  an  entire  issue  of  bonds  ($100,000  par  value) 
yielded  $105,000  through  sale,  after  all  expenses  in  connection  with  floating 
the  issue  were  paid,  how  would  you  record  the  receipt  of  the  amount  in  excess 
of  par  value,  and  what  disposition  would  you  make  of  such  item? 

Question  102 — Can  surplus  be  created  in  any  other  way  than  through  profits 
earned  from  operations? 

Question  103 — What  entry  should  be  made  in  the  books  of  account  of  a  cor- 
poration with  respect  to  dividend  authorized  by  the  board  of  directors,  even 
though  payment  of  such  dividend  may  be  indefinitely  deferred? 

Question  104 — Is  it  proper  under  any  circumstances  to  borrow  cash  with 
which  to  pay  dividends? 

Question  105 — Why  is  it  necessary  to  include  in  a  revenue  statement  or 
profit  and  loss  account,  an  amount  to  represent  depreciation  of  plant  and 
equipment,  when  such  plant  and  equipment  have  been  maintained  to  the  highest 
degree  of  efficiency  through  repairs  and  renewals,  and  when  to  replace  same, 
even  in  their  used  or  second-hand  condition,  would  cost  considerably  more  than 
the  original  purchase  price? 

Copyright,  1917,  The  Ronald  Press  Company 


1-27-6 
Question  106 — Assuming  that  a  reserve  had  been  set  up  in  the  accounts  at 
December  31,  1916,  to  provide  for  bad  and  doubtful  accounts,  how  would  you 
treat  an  account  which  appeared  on  the  books  at  that  date,  but  which  becoming 
uncollectible  in  1917,  is  to  be  charged  off? 

Question  107 — Differentiate  between  a  reserve  set  aside  out  of  earnings 
(a)  for  retirement  of  bonds  or  any  other  debt  ;  (b)  for  depreciation  of  fixed 
assets. 

Question  108 — When,  and  under  what  circumstances,  is  it  most  proper  to 
bring  into  the  accounts  an  amount  to  represent  the  value  of  good-will? 

Question  109 — What  do  you  understand  by  the  phrase,  "Capitalize  such  earn- 
ings as  exceed  the  ordinary  interest  return  on  the  investment?" 

Question  110 — What  do  you  understand  by  the  term  "Consolidated  Balance 
Sheet,"  and  in  what  class  of  corporations  are  such  balance  sheets  used? 

Question  111 — Give  the  principles  underlying  the  perpetual  inventory,  and 
state  the  advantages  derived  from  its  use?  How  are  perpetual  inventory  ac- 
counts related  to  controlling  accounts? 

Question  112 — Explain  three  methods  of  providing  for  depreciation  which 
are  in  general  use. 

Question  115 — Give  some  of  the  essential  elements  of  the  voucher  system. 
Under  what  circumstances  would  the  use  of  the  modern  voucher  system  be  inad- 
visable? 

Question  114 — If  you  were  the  clerk  in  charge  of  the  voucher  register  and 
a  voucher  were  handed  to  you  for  entry,  what  approvals  would  you  look  for? 

ANSWERS  TO  QUESTIONS 

Answer  to  Question  76 — 

1.  Assuming  the  par  value  in  each  case  to  be  $100,  the  actual  return  on 

6 

the  6%  stock  will  be  S6  a  year,  which  is  or  4.03%  on  the  investment. 

148% 

4.50 

The  4^/^%  stock  will  yield  4.004%  ( )  on  the  investment;  hence,  the  first 

112% 

stock  is  preferable  as  to  income. 

2.  The  investment  will  be  represented  by  the  price  paid  for  the  stock  plus 
costs  of  purchase,  in  this  case  119%+%,  or  120.   If,  for  every  |120  invested, 
it  is  desired  to  obtain  a  5%  income,  or  $6,  it  is  apparent  that  a  6%  stock 
must  be  purchased. 


Copyright,  1917,  The  Ronald  Press  Company 


1-27-7 
Answer  to  Question  77 — 

-June  1,  1917- 

(1) 

Interest  on  Bonds  (  15,000.00 

To — Cash  $  15,000.00 

Final  instalment  of  interest  paid  to  bond- 
holders. 

(2) 
Sinking  Fund  Trustee  33,333.33 

To— Cash  33,333.33 

Final  instalment  of  sinking  fund  paid  to 
sinking  fund  trustee. 

(3) 
Provision  for  Sinking  Fund  Reserve  33,333.33 

To — Sinking  Fund  Reserve  33,333.33 

To  record  yearly  provision  for  sinking  fund. 

(4) 

Interest  on  Bonds  1,602.00 

To — Bond  Discount  and  Expense  1,602.00 

To  close  out  proportion  of  bond  discount 
and  expense  for  year. 

(5) 
Bonds  Outstanding  500,000.00 

To — Sinking  Fund  Trustee  500,000.00 

Payment  of  bonds  by  trustee. 

(6) 

Sinking  Fund  Reserve  500,000.00 

To — Surplus  500,000.00 

To  write  back  sinking  fund  reserve  per 
resolution  of  the  Board  of  Directors. 
See  minute  book,  page 

Answer  to  Question  78 — Periodically  the  purchaser  will  have  increased  his 
bond  investment  account  so  that  at  maturity  it  will  appear  on  his  books  at 
$100,000,  the  final  entry  necessary  to  raise  it  to  this  value  being: 

-June  1,  1917- 

(1) 
Investment  in  B  Manufacturing  Co.  Bonds       |    566.67 

To — Income  from  Bonds  $    566.67 

Proportion  of  difference  between  cost  and 
redemption  price  of  bonds  (on  yearly 
basis). 

(2) 
Cash  3,000.00 

To — Income  from  Bonds  3,000.00 

Semiannual  interest  coupons. 

Copyright,  1917,  The  Ronald  Press  Company 


1-27-8 
(3) 
Cash  $100,000.00 

To — Investment  in  B  Manufacturing  Co. 

Bonds  $100,000.00 

Surrender  and  redemption  in  cash,  being  due 
June  1,  1917. 

Answer  to  Question  79 — 

-December  31,  1916- 
Investment  in  B  Manufacturing  Co.  Stock        112,500.00 

To — Income  from  Subsidiaries  112,500.00 

To  take  up  our  portion  of  profits  as  per 
their  Statement  of  Profits  and  Income. 

-January  5,  1917- 
Dividends  Receivable  from  Subsidiaries         60,000.00 
To — Investment  in  B  Manufacturing  Co. 

Stock  60,000.00 

Dividend  declared  this  date. 

-January  31,  1917- 
Cash  60,000.00 

To — Dividends  Receivable  from  Subsidiaries  60,000.00 

Dividend  declared  January  5,  1917,  paid  todey. 


Copyright,  1917,  The  Ronald  Press  Company 


1-27-9 
GOOD-WILL 

DEFINITION— "Good-will  represents  the  value  of  business  connections,  the 
value  of  the  probability  that  present  customers  will  continue  to  buy,  in  spite 
of  the  allurements  of  competing  dealers."  (Hatfield)   In  the  average  business, 
even  though  long  established  and  well  patronized,  the  item  good-will  ordi- 
narily will  not  be  found  in  the  accounts,  unless  a  reorganization  or  purchase 
of  another  business  has  taken  place, 

VALUATION — A  computation  of  good-will  is  based  (1)  on  the  existence  of 
surplus  earnings  over  a  reasonable  return  on  the  capital  investment,  or  (2)  on 
the  excess  of  the  par  value  of  securities  exchanged  over  the  accepted  value  of 
the  net  tangible  assets  taken  over. 

The  value  of  excess  earnings  is  determined  according  to  any  one  of  three 
methods  as  follows: 

(a)  Capitalize  the  average  net  profits  and  deduct  the  value  of  tangible 
assets.   Thus,  if  the  average  yearly  net  profits  are  $15,000  and  a  reasonable 
return  is  estimated  at  6%,  the  capital  necessary  to  produce  this  income  is 

15,000  .  ^ 

or  $250,000.  Assuming  the  accepted  value  of  the  tangible  assets  to  be 

.06 
$180,000,  the  good-will  valuation  will  be  $70,000. 

(b)  If  excess  earnings  are  considered  uncertain  for  the  future  it  may  be 

desirable  to  capitalize  them  at  a  higher  rate.   The  yearly  net  profits  being 

$15,000,  and  a  fair  return  on  the  capital  invested  considered  as  6%  of 

$180,000,  or  $10,800,  the  income  attributable  to  the  asset  good-will  is  $4,200 

4,200 
which,  capitalized  at  10%,  amounts  to  $42,000  (     ). 

.  xu 

(c)  A  number  of  years'  purchase  of  the  average  net  profits.   The  applica- 
tion of  this  rule  varies  according  to  whether  "net  profits"  is  taken  to  mean 
before  or  after  providing  for  a  fair  return  of  the  invested  capital,  owner's 
salary,  depreciation,  etc.  Usually  the  computation  is  made  after  allowing  for 
all  these  deductions  £ind  multiplying  the  result  by  the  agreed  number  of  years. 
In  the  illustration  cited  the  excess  profits,  after  deducting  a  fair  return  on 
the  capital  invested,  were  $4,200.  Based  on  a  five  years'  purchase  of  these 
excess  profits,  the  good-will  valuation  is  $21,000.   In  the  preceding  para- 
graph the  valuation  of  good-will  there  shown  is  equivalent  to  a  ten  years* 
purchase  of  the  excess  profits. 

2.  Whenever  the  par  value  of  the  securities  of  a  new  corporation  exceeds 
the  accepted  value  of  the  assets  of  a  business  exchanged  for  the  securities, 
it  is  the  practice  to  show  the  difference  as  good-will.   The  computation 
should  be  based  on  one  of  the  methods  just  described,  otherwise  the  stock  is 
termed  "watered."   It  was  formerly  common  on  the  books  of  a  new  corporation  to 
find  a  single  Plant  account  which  was  debited  with  the  par  value  of  securities 
issued,  but  the  practice  has  been  strongly  discouraged  by  accountants. 

CHANGING  VALUATION  OF  GOOD-WILL— Any  change  in  the  value  of  the  asset  of 
good-will  should  be  referred  to  as  FLUCTUATION,  not  DEPRECIATION  or  APPRECIA- 
TION.  Such  fluctuation  is  the  direct  result  of  an  increase  or  decrease  in 
earnings,  and  it  is  obvious  that  this  fluctuation  itself  should  not  in  any  way 
increase  or  decrease  earnings. 

Copyright,  1917,  The  Ronald  Press  Company 


1-27-10 
It  follows  that  good-will  need  not  be  charged  off  for  the  purpose  of 
stating  true  earnings.   The  desirability  of  charging  off  good-will  is  a  ques- 
tion to  be  passed  upon  by  the  management,  and  any  amount  charged  off  would 
represent  an  appropriation  of  profits  rather  than  an  expense.   In  connection 
,  with  this  proposed  treatment  the  following  quotations  will  be  of  interest: 

"And  where  it  is  clear  that  the  valuation  of  the  good-will  was  erroneous, 
that  it  is  not  worth  its  book  value,  the  best  method  of .  adjusting  is  that  ad- 
vocated by  Dicksee,  to  offset  the  decline  in  its  value  by  a  reduction  of  capi- 
tal, not  by  a  charge  against  profits."  (Hatfield) 

"As  good-will  does  not  suffer  wear  and  tear,  does  not  become  obsolescent, 
is  not  used  up  in  the  operation  of  business,  depreciation,  as  such,  cannot  be 
charged  against  it."  (Montgomery) 
p      Good-will  varies  from  day  to  day  and  its  value  is  unknown  until  the  busi- 
ness is  disposed  of.   Its  uncertain  value  is  the  chief  argument  for  its  elimi- 
nation from  the  books. 


u. 


PATENTS,  COPYRIGHTS,  AND  TRADE-MARKS 

Patents,  copyrights,  and  trade-marks  are  rights  issued  by  the  federal  gov- 
ernment to  individuals  or  businesses  allowing  the  exclusive  use  of  these 
rights  for  a  certain  period  of  time.  A  patent  is  issued  for  seventeen  years, 
a  copyright  for  twenty-eight  years  (renewable  for  an  additional  fourteen 
years),  and  a  trade-mark  for  thirty  years  (renewable  for  an  additional  thirty 
years).   A  small  fee  is  paid  the  government  at  the  time  of  registration. 

Patents  are  valued  at  cost,  including  legal  fees  and  other  costs  of  main- 
taining title  to  them.  Although  their  life  may  be  reckoned  as  seventeen 
years,  and  depreciation  provided  accordingly,  it  is  more  conservative  to  write 
off  their  costs  in  a  much  shorter  time.   Similar  patents  may  be  secured  by 
rival  concerns  or  improved  substitutes  introduced  with  the  result  that  a  pat- 
ent or  series  of  patents  may  become  valueless.   Some  patents  taken  out  or  pur- 
chased may  immediately  prove  worthless,  in  which  case  their  cost  should  be 
written  off  at  once. 

Copyrights  and  trade-marks  follow  the  same  general  rule,  i.e.,  should  be 
valued  at  cost  and  generally  depreciated  more  rapidly  than  the  period  of  their 
protection  would  indicate,  for  the  reason  that  their  future  value  is  uncer- 
tain. 

In  many  cases  patents,  trade-marks,  and  copyrights  are  viewed  as  good-will 
and  as  such  would  not  be  written  off  for  the  reasons  previously  mentioned. 

REFERENCES : 

Hatfield,  pages  107-118 
Montgomery,  pages  123-128 
Wildman,  Chapters  XXV  and  XXIII 


Copyright,  1917,  The  Ronald  Press  Company 


1-28-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  28 
CONSOLIDATIONS 


WORK  TO  BE  DONE  IN  THE  PRACTICE  SET 

Total  raw  material  requisitions  issued  during  month  $18, 897. 04,      * 

Finished  parts  used  in  production  $45,109.16. 

Finished  parts  sold  $25,724.33. 

Work  in  Progress  transferred  to  Finished  Stock,  $142,725.39. 

Cost  of  automobile  sales  $175,543.64. 

From  this  information  prepare  closing  entries,  balance  sheet  as  of  June 
30,  and  a  statement  of  profit  and  loss  for  the  month  ending  that  date. 


Solution  to  Assignment  1-26-2 

MILLER  MOTOR  CAR  CO. 
TRIAL  BALANCE,  JUNE  30,  19— 

DEBIT 
Land  $   40,000.00 

Buildings  70,000.00 

Reserve  for  Depreciation  on  Buildings 

Machinery,  Tools,  and  Equipment  165,603.50 

Reserve  for  Depreciation  on  Machinery,  Tools 

and  Equipment 
Office  and  Warehouse  Fixtures  2,045.00 

Reserve  for  Depreciation  on  Office  and  Warehouse 

Fixtures 
Delivery  Equipment  1,750.00 

Reserve  for  Depreciation  of  Delivery  Equipment 

Good-will  66,000.00 

Investments  200,000.00 

Inventory  of  Automobiles  63,368.25 

Inventory  of  Work  in  Progress  31,710.17 

Inventory  of  Raw  Materials  5,870.40 

Inventory  of  Finished  Parts  22,774.08 

Inventory  of  Miscellaneous  Supplies  3,600.00 

Customers'  Accounts  104,013.40 

Notes  Receivable  116,003.00 

Accrued  Interest  on  Notes  Receivable  315.92 

Reserve  for  Bad  Debts 
Reserve  for  Discounts 

Cash  in  Bank  50,186.45 

Petty  Cash  Fund  500.00 

Copyright,  1917,  The  Ronald  Press  Company 


CREDIT 

200.00 

2,213.36 

17.48 
43.76 


1,522.75 
1,800.00 


1-28-2 


Advances  to  Salesmen 

Unexpired  Insurance 

Rent  Paid  in  Advance 

Discount  on  Stock 

Capital  Stock — 7%  Preferred 

Capital  Stock — Common 

Unissued  Common  Stock 

5%  First  Mortgage  Bonds 

6%   First  Mortgage  Bonds 

Audited  Vouchers 

Accrued  Bond  Interest 

Accrued  Taxes 

Accrued  Pay-roll 

Surplus 

Sales — Automobiles 

Allowances  on  Sales — Automobiles 

Sales — Finished  Parts 

Allowances  on  Sales — Finished  Parts 

Discount  on  Sales — Finished  Parts 

Discount  on  Purchases 

Interest  Received 

Purchases — Raw  Material 

Purchases — Finished  Parts 

Direct  Labor 

Indirect  Labor 

Repairs,  Plant,  and  Equipment 

Heat,  Light,  and  Power 

Royalties 

Shop  Supplies 

Depreciation 

Insurance 

Taxes 

Miscellaneous  Factory  Expenses 

Salesmen's  Salaries 

Salesmen's  Traveling  Expenses 

Advertising 

Delivery  Equipment  Maintenance 

Depreciation  on  Delivery  Equipment 

Miscellaneous  Selling  Expenses 

Officers'  Salaries 

Office  Salaries 

Depreciation  on  Office  and  Warehouse  Fixtures 

Stationery  and  Printing 

Bad  Debts 

Bond  Interest 

Interest  Paid 


$  2,000.00 

766.66 

100.00 

2,000.00 


66,100.00 


1,854.00 

2,052.75 
4,990.51 


16,767.44 

66,523.13 

39,901.98 

21,171.14 

3,309.60 

5,459.75 

600.00 

683.85 

1,496.70 

76.67 

285.67 

155.77 

6,491.00 

837.00 

25,647.25 

108.54 

21.88 

203.45 

2,500.00 

1,328.25 

10.23 

593.75 

1,449.63 

1,000.00 

222.94 


100,000.00 
500,000.00 

150,000.00 

75,000.00 

60,144.12 

4,625.00 

2,295.34 

41,649.55 

4,515.02 

235,385.00 

39,191.08 


1,129.82 
717.43 


)1, 220, 449. 71   !iJl,  220,449. 71 


Prepare  and  post  entries  necessary  to  close  books  at  June  30. 
Copyright,  1917,  The  Ronald  Press  Company 


1-28-3 


Solution  to  Problem  20 

-July  1,  1917- 

(1) 

Operating  Expense  (Depreciation)  $  150.00 

To — Reserve  for  Depreciation  $  150.00 

Depreciation  from  January  1  to  July  1  on 
Truck  1. 

(2) 

Operating  Expense  (Depreciation)  21.43 

Surplus  128.57 

Reserve  for  Depreciation  1,050.00 

To — Automobile  Delivery  Truck  Account  1,200.00 

Truck  1  scrapped.   Shortage  in  provision  for 
depreciation  pertaining  to  prior  years 
charged  direct  to  Surplus  account. 

(3) 
Automobile  Delivery  Truck  Account  1,500.00 

To — Accounts  Payable  1,500.00 

Truck  5  purchased. 

-August  1,  1917- 
(4) 
Operating  Expense  (Depreciation)  175.00 

To — Reserve  for  Depreciation  175.00 

Depreciation  from  January  1  to  August  1  on 
Truck  2. 

(5) 
Automobile  Delivery  Truck  Account (#6)  1,500.00 

To — Automobile  Delivery  Truck  Account  (#2)  850.00 

Cash  650.00 

Purchase  of  Truck  6  in  exchange  for  Truck  2 
and  cash. 

(6) 
Reserve  for  Depreciation  475.00 

To — Automobile  Delivery  Truck  Account  350.00 

Surplus  78.95 

Operating  Expense  (Depreciation)  46.05 

To  write  off  balance  of  account  with  Truck  2 
exchanged,  and  to  credit  back  over-provision 
for  depreciation. 

-September  1,  1917- 
(7) 
Operating  Expense  (Depreciation)  200.00 

To — Reserve  for  Depreciation  200.00 

Depreciation  from  January  1  to  September  1 
on  Truck  4. 

(8) 
Reserve  for  Depreciation  500.00 

Insurance  Adjustment  Account  700.00 

To — Automobile  Delivery  Trucks  1,200.00 

Truck  4  totally  destroyed. 

Copyright,  1917,  The  Ronald  Press  Company 


1-28-4 


(9) 
Cash  $750.00 

To — Insurance  Adjustment  Account  $750.00 

Proceeds  from  insurance  carried  on  Truck  4, 

(10) 
Insurance  Adjustment  Account  50.00 

To — Profit  and  Loss  50.00 

Excess  of  proceeds  over  book  value  of  Truck  4. 

(11) 
Operating  Expense  (Depreciation)  293.75 

To — Reserve  for  Depreciation  293.75 

Provision  for  depreciation  to  September  1  of 
following  trucks: 


#3-8  months 

$200.00 

#5-2  months 

62.50 

#6-1  month 

31.25 

$293.75 


The  above  entries  having  been  made  and  posted,  the  Auto  Delivery  Truck 
Account  will  have  a  balance  of  $4,200,  representing  the  cost  of  the  trucks  on 
hand  (#3,  5,  and  6)  ;  the  Reserve  for  Depreciation  will  contain  a  balance  of 
$593.75,  the  accrued  depreciation  to  date  on  the  three  trucks. 

ANSWERS  TO  QUESTIONS 

Answer  to  Question  80 — The  cost  of  the  sprinkler  system  should  be  charged 
to  some  equipment  (capital  asset)  account,  and  depreciation  written  off  from 
year  to  year  and  debited  to  manufacturing  operations. 

Dividends  received  from  the  mutual  insurance  companies  at  the  end  of  the 
year  should  be  credited  to  Insurance  Expense  account  since  they  represent  a 
return  of  part  of  the  premium  paid  at  the  beginning  of  the  year.   Dividends  of 
this  nature  should  not  be  confused  with  dividends  from  investments,  the  latter 
being  an  earning,  the  former  a  reduction  of  an  expense. 

Answer  to  Question  81 — 

(a)  Revenue. 

(b)  Capital;  care  being  taken  that  the  old  assets  replaced  are  written 
off. 

(c)  Revenue,  unless  part  of  the  royalties  apply  on  a  purchase  agreement, 
in  which  case  they  would  be  prorated  as  between  capital  and  revenue. 

(d)  Capital,  the  item  being  one  of  the  costs  necessary  in  obtaining  the 
asset. 

(e)  A  deferred  charge  to  be  written  off  over  the  life  of  the  mortgage. 

(f)  Capital  charge  to  be  written  off  during  the  life  of  the  patent,  if  not 
sooner. 

(g)  A  deferred  charge  to  be  written  off  within  three  or  five  years.   Often 
permanently  capitalized  in  the  case  of  public  utility  corporations. 

Copyright,  1917,  The  Ronald  Press  Company 


1-28-5 

CONSOLIDATIONS 

ADVANTAGES — The  advantages  of  consolidation  may  be  briefly  summed  up  as 
follows: 

1.  Decrease  expenses,  such  as  duplicate  salesmen,  executive  officials, 

accounting  departments,  etc. 

2.  Specialization  on  certain  lines  by  the  constituent  components, 

eliminating  duplication  in  manufacturing  and  equipment. 

3.  Ability  to  hire  the  best  men,  since  the  cost  is  distributed  over 

all  the  constituent  components  and  not  borne  entirely  by  any  one. 

4.  Larger  profits  through  obtaining  a  partial  monopoly  and  maintaining 

sales  prices  at  a  higher  level. 

5.  Better  facilities  for  borrowing  money  and  obtaining  additional 

capital. 

METHODS  USED — The  combination  of  two  or  more  companies  into  a  single 
organization  may  be  effected  through  (1)  merger  or  (2)  holding  company. 

A  merger  is  the  complete  amalgamation  of  the  constituent  companies  into  a 
single  company.   The  latter  may  be  a  new  corporation  or  one  of  the  constitu- 
ent companies.   In  either  case  the  new  organization  would  acquire  the  net 
assets  of  all  the  other  companies  which  would  then  be  dissolved. 

An  alternate  procedure  is  to  organize  a  new  company  for  the  purpose  of 
controlling  the  constituent  companies  through  the  ownership  of  a  majority  of 
the  stock  of  each  constituent  company.   The  latter  retain  their  separate  cor- 
porate existence  and  operate  as  distinct  organizations  as  heretofore.   The 
control  by  the  holding  company  arises  through  the  election  of  a  majority  of 
the  board  of  directors  of  each  company.  Under  this  method  the  holding  company 
is  usually  the  financial  organization  and  the  subsidiaries  are  manufacturing 
or  selling  organizations. 

A  new  company  need  not  be  organized  where  the  laws  of  a  state  permit  one 
of  the  constituent  companies  to  acquire  controlling  interests  in  the  other 
companies. 

EFFECT  ON  ACCOUNTING  PROCEDURE— 

1.  MERGED  COMPANY.   The  accounts  in  this  case  would  not  differ  from  those 
of  any  other  corporation, 

2.  SUBSIDIARY  COMPANY.   There  would  be  no  change  in  the  financial  accounts 
of  the  subsidiary  of  a  holding  company.   The  only  change  would  be  on  the  stock 
ledger  recording  the  transfer  of  shares  from  one  set  of  stockholders  to  an- 
other.  Sometimes  there  appears  an  additional  asset  of  "Advances  to  Holding 
Company,"  or  an  additional  liability  of  "Advances  from  Holding  Company." 

3.  HOLDING  COMPANY.   The  accounts  peculiar  to  a  holding  company  are: 

Assets — Investments  in  Subsidiaries ;  Advances  to  Subsidiaries 
Liabilities — Advances  from  Subsidiaries 

Copyright,  1917,  The  Ronald  Press  Company 


1-28-6 

If  the  holding  company  is  merely  a  financial  organization  and  does  not  engage 
also  in  manufacturing  and  selling  activities,  its  chief  source  of  income  is 
dividends  from  subsidiaries  and  its  principal  expenses  would  be  incurred  on 
account  of  the  executive  staff.   Sometimes  these  expenses  are  prorated  among 
the  subsidiaries  as  cost  of  services  rendered  such  subsidiaries  by  the  holding 
company. 

CONSOLIDATED  BALANCE  SHEET — This  is  not  the  balance  sheet  of  the  holding 
company,  nor  of  any  legal  entity  whatsoever.   It  is  a  statement  set  up  in  con- 
ventional balance  sheet  form,  designed  to  set  out  the  true  financial  condition 
of  the  holding  company  and  its  subsidiaries  viewed  as  a  single  organization  at 
a  particular  moment  of  time  and  as  a  going  concern. 

The  method  of  preparing  this  statement  is  illustrated  in  Problem  22. 
Similar  assets  and  liabilities  of  all  companies  are  totalled.   Intercompany 
transactions  are  omitted  since  the  total  amount  which  the  compsinies  owe  one 
another  must  equal  the  total  amount  which  is  due  from  one  another  ;  and  con- 
sidered as  one  unit  these  transactions  have  no  bearing  on  the  financial  posi- 
tion.  If  the  investment  in  subsidiary  companies  was  made  at  book  value,  then 
it  is  equal  to  and  offsets  the  capital  stock  and  surplus  of  all  the  subsid- 
iaries.  It  is  obvious  that  the  effect  of  this  procedure  is  to  substitute  the 
net  assets  of  the  subsidiary  in  lieu  of  the  asset  of  investment  in  subsidiary 
company. 

CONSOLIDATED  PROFIT  AND  LOSS  STATEMENT — The  same  method  is  pursued  in 
preparing  the  profit  and  loss  statement.   Dividends  paid  by  one  company  to 
another  are  ignored,  and  only  the  dividends  of  the  holding  company  shown.   The 
object  is  to  show  the  result  from  operations  of  all  the  companies  considered 
as  one  unit  in  their  relations  to  outsiders. 


Problem  22  (Class  Work) 

The  General  Manufacturing  Co.  was  organized  on  January  1,  1917,  with  an 
authorized  capital  stock  of  $300,000  divided  into  3,000  shares  at  $100  each. 
On  the  sane  date  they  acquired  on  the  open  market  the  entire  issue  of  capital 
stock  of  the  Williams-Smith  Co.  (2,000  shares,  par  value  $100),  giving  in  ex- 
change 2,400  shares  of  stock  of  the  General  Manufacturing  Co.   During  the  year 
the  remaining  600  shares  of  the  General  Manufacturing  Co.  were  disposed  of  at 
par  for  cash. 

On  January  1  and  December  31,  1917,  trial  balances  abstracted  from  the 
books  of  the  Williams-Smith  Co.  stood  as  follows: 

ASSETS 

JAN.  1  DEC.  31 

Plant  and -Equipment                               $175,000.00  $180,000.00 

Inventories                                        43,500.00  57,100.00 

Customers*  Accounts                                 35,450.00  31,500.00 

Cash                                              14,050.00  17,900.00 


$268,000.00  $286,500.00 


Copyright,  1917,  The  Ronald  Press  Company 


LIABILITIES 


Capital  Stock 

Audited  Vouchers 

Surplus — Balance,  January  1 

Profits  for  year 


1-28-7 

JAN.  1  DEC.  31 

$200,000.00  $200,000.00 

28,000.00  34,500.00 

40,000.00  40,000.00 

12,000.00 


$268,000.00  $286,500.00 


On  December  31,  1917,  the  balance  sheet  of  the  General  Manufacturing  Co. 
was  prepared  as  follows: 


ASSETS 


INVESTMENT  IN  WILLIAMS-SMITH  CO. 
CURRENT  ASSETS: 

Merchandise  Inventory 

Customers'  Accounts 

Cash 


$240,000.00 

$40,000.00 
25,000.00 
15,000.00    80,000.00 


LIABILITIES 


CAPITAL  STOCK 

CURRENT  LIABILITIES: 
Audited  Vouchers 

SURPLUS : 

Profit  for  year 


$320,000.00 

$300,000.00 
15,000.00 

5,000.00 

$320,000.00 


Prepare  a  consolidated  balance  sheet  of  the  two  companies  for  December 
31,  1917. 

Solution  to  Problem  22 

To  show  the  profits  of  the  Willi£ims-Smith  Co.  on  the  books  of  the  General 
Manufacturing  Co.,  the  following  journal  entry  would  be  made  on  the  books  of 
the  latter: 


Investment  in  Williams-Smith  Co. 
To — Profit  and  Loss 
To  take  up  the  profits  for  1917  of  the 
Williams-Smith  Co.  as  per  their  statement 
of  profits  and  income  dated  December  31, 
1917. 


$12,000.00 


$12,000.00 


Copyright,  1917,  The  Ronald  Press  Company 


The  following  consolidated  working  sheet  would  then  be  prepared 


1-28-8 


GENERAL  MANUFACTURING  CO. 

AND  WILLIAMS-SMITH  CO. 

CONSOLIDATED  WORKING  SHEET,  DECEMBER  31,  1917 

ASSETS 


ACCOUNT 
Plant  and  Equipment 
Investment  in  Williams- 
Smith  Co. 

Par  Value 
Surplus 
Inventories 
Customers'  Accounts 
Cash 


GENERAL   WILLIAMS- SMITH 
MFG.  CO.        CO. 
^ $180,000.00 


252,000.00 


40,000.00 
25,000.00 
15,000.00 


57,100.00 
31,500.00 
17,900.00 


INTERCOMPANY 
ADJUSTMENTS 


(A)200,000.00 
(B)  52,000.00 


COMBINED 
$180,000.00 


97,100.00 
56,500.00 
32,900.00 


$332,000.00  $286,500.00    $252,000.00   $366,500.00 


Capital  Stock — G.  M. 
Capital  Stock — W.  S. 
Audited  Vouchers 
Surplus — G.  M. 
Surplus — W.  S. 


LIABILITIES 
$300,000.00  $ 


200,000.00  (A)200,000.00 

15,000.00  34,500.00     

17,000.00   

52,000.00  (B)  52,000.00 


$300,000.00 

49,500.00 
17,000.00 


$332,000.00  $286,500.00    $252,000.00   $366,500.00 


GENERAL  MANUFACTURING  CO. 
AND  WILLIAMS- SMITH  CO. 
CONSOLIDATED  BALANCE  SHEET,  DECEMBER  31,  1917 


ASSETS 
CAPITAL  ASSETS: 

Plant  and  Equipment 


$180,000.00 


CURRENT  A5SETS: 

Inventories    $97,100.00 
Customers' 

Accounts     56,500.00 
Cash  32,900.00  186,500.00 


$366,500.00 


LIABILITIES 
CAPITAL  STOCK—Issued  and 
Outstanding 

CURRENT  LIABILITIES: 
Audited  Vouchers 

SURPLUS : 

Profits  for  year 


$300,000.00 

49,500.00 

17,000.00 
$366,500.00 


Copyright,  1917,  The  Ronald  Press  Company 


1-29-1 


COMPLETE  ACCOUNTING  COURSE— PART  I 

Lecture  29 
ANSWERS  TO  GENERAL  REVIEW  QUESTIONS 


Solution  to  General  Review  Problem  21 


JONES  LITHOGRAPHING  CO. 
BALANCE  SHEET,  DECEMBER  31,  1917 


CURRENT  ASSETS: 

Cash 

Working  Fund 

Accounts  Receivable 

Due  from  Officers 

Inventories: 

Raw  Materials 
Work  in  Progress 


ASSETS 


7,150.00 

1,000.00 

54,300.00 

10,100.00 

9,800.00 
4,500.00 


Exhibit  A. 


$   86,850.00 


DEFERRED  CHARGES: 

Discount  on  Stock 
Prepaid  Commissions 
Inventory  of  Postage 
Prepaid  Insurance 


$  10.300.00 

8,140.00 

500.00 

1,110.00 


20,050.0a 


INVESTMENT  IN  X  PRINTING  CO. 


CAPITAL  ASSETS: 
Land 

Buildings 
Machinery- 
Fixtures 

Total 


TOTAL  ALL  ASSETS 


Cost 

$  45,000.00 

351,300.00 

236,500.00 

166,000.00 


Reserve  for 
Depreciation 
$ 

73,565.00 
81,850.00 
62,400.00 


Book 

Value 

$  45,000.00 

277,735.00 

154,650.00 

103,600.00 


$798,800.00  $217,815.00   $580,985.00 


350,000.00 


580,985.00 


$1,037,885.00 


Copyright,  1917,  The  Ronald  Press  Company 


CURRENT  LIABILITIES: 
Accounts  Payable 
Notes  Payable 
Bank  Loan 

Accrued  Bond  Interest 
Accrued  Taxes 

FIRST  MORTGAGE  4%  BONDS 
SINKING  FUND  RESERVE 
CAPITAL  STOCK  AND  SURPLUS: 
Issued  and  Outstanding 
Deficit,  Jan.  1,  1917 

Less — Surplus  Net  Profit  for 
year  (Exhibit  B) 

TOTAL  LIABILITIES  AND  CAPITAL 


LIABILITIES  AND  CAPITAL 


1-29-2 


6,000.00 
2,000.00 
10,000.00 
8,000.00 
1,907.30 


$500,000.00 


$245,700.00 

15,677.70   230,022.30 


27,907.30 

400,000.00 
340,000.00 


269,977.70 
$1,037,885.00 


JONES  LITHOGRAPHING  CO, 

STATEMENT  OF  PROFITS  AND  INCOME 

YEAR  ENDING  DECEMBER  31,  1917 


Exhibit  B 


SALES 

Less — Allowances  on  Sales 

NET  SALES 
COST  OF  GOODS  SOLD  (Exhibit  C) 

GROSS  PROFIT  FROM  SALES 
DEDUCT—SELLING  AND  GENERAL  EXPENSES: 
Selling  Expenses  (Exhibit  D) 
General  and  Administrative  Expenses  (Exhibit  E) 

NET  PROFIT  FROM  OPERATIONS 
ADD — Dividend  on  X  Printing  Co.  Stock 

Total  Profits  and  Income 
DEDUCT — Interest  on  Bonds 
Discount  on  Sales 
Discount  on  Stock  written  off 

SURPLUS  NET  PROFIT  for  year 
DEDUCT — Provision  for  Sinking  Fund 

BALANCE  CARRIED  TO  SURPLUS  ACCOUNT 


$  37,330.00 
30,512.30 


$  16,000.00 
2,400.00 
5,000.00 


$942,000.00 
8,450.00 

$933,550.00 
813,630.00 

$119,920.00 


67,842.30 

$  52,077.70 
7,000.00 

$  59,077.70 


23,400.00 

$  35,677.70 
20,000.00 

$  15,677.70 


Copyright,  1917,  The  Ronald  Press  Company 


1-29-3 
Exhibit  C 


JONES  LITHOGRAPHING  CO. 

STATEMENT  SHOWING  COST  OF  SALES 

YEAR  ENDING  DECEMBER  31,  1917 

RAW  MATERIAL  USED 
DIRECT  LABOR 
FACTORY  OVERHEAD: 

Manufacturing  Supplies  I 

Heat ,  Light ,  and  Power 

Insurance 

Indirect  Labor 

Sundry  Manufacturing  Expenses 

Property  Taxes 

Depreciation 

Salary  to  W.  R,  Single 

TOTAL  MANUFACTURING  COST 
DEDUCT — Increase  of  Inventory  of  Work  in  Progress: 

December  30,  1917  5 

January   1,  1917 

Cost  of  Product  Sold  (Exhibit  B) 


8,500.00 

9,200.00 

1,870.00 

11,000.00 

14,150.00 

945.00 

65,215.00 

6,000.00 


4,500.00 
3,100.00 


$573,150.00 
125,000.00 


116,880.00 
$815,030.00 

1,400.00 
$813,630.00 


JONES  LITHOGRAPHING  CO. 
SELLING  EXPENSES 
YEAR  ENDING  DECEMBER  31,  1917 


Exhibit  D 


Commissions  to  Salesmen 
Promotion  Expense 


TOTAL  SELLING  EXPENSES  (Exhibit  B) 


$  33,330.00 
4,000.00 

$  37,330.00 


Exhibit  E 


JONES  LITHOGRAPHING  CO. 

GENERAL  AND  ADMINISTRATIVE  EXPENSES 

YEAR  ENDING  DECEMBER  31,  1917 

Salary — D.  R.  Jones 

General  and  Administrative  Expense  (unclassified) 

Depreciation  on  Fixtures 

Bad  Debts 

Income  Tax  cuid  Capital  Stock  Tax 

TOTAL  GENERAL  AND  ADMINISTRATIVE 
EXPENSES  (Exhibit  B) 


$  12,000.00 

15,300.00 

900.00 

1,350.00 

962.30 


$  30,512.30 


Copyright,  1917,  The  Ronald  Press  Company 


1-29-4 

ANSWERS  TO  GENERAL  REVIEW  QUESTIONS 

Answer  to  Question  82 — 

1.  From  all  available  sources  prepare  a  schedule  of  assets  and  liabili- 
ties at  the  end  of  the  period  for  which  the  profit  or  loss  is  to  be  ascer- 
tained.  The  difference  between  the  assets  and  liabilities  is  the  net  worth 
(if  the  assets  exceed  the  liabilities)  or  the  net  insolvency  (if  the  liabili- 
ties exceed  the  assets)  at  that  date. 

2.  Prepare  a  similar  statement  as  of  the  date  the  period  under  considera- 
tion begins,  and  the  difference  between  the  assets  and  liabilities  will  repre- 
sent the  net  worth  or  net  insolvency  at  that  time. 

3.  The  difference  between  the  net  worth  at  the  beginning  of  the  period  and 
the  net  worth  at  the  end  of  the  period  is  caused  by: 

(a)  Moneys  invested  or  withdrawn  by  the  proprietors. 

(b)  Profits  made  or  losses  incurred  by  the  enterprise. 

4.  The  following  form  presents  the  above  facts: 


(Name) 

STATEMENT  OF  PROFITS 

(Period  covered) 


Net  Worth  at  end  of  the  period 
Net  Worth  at  beginning  of  period 

Balance — being  increase  (or  decrease)  in  net  worth  during 

period 
Add — Dravfings  of  proprietors  during  period 


Deduct — Additional  Capital  contributed  by  proprietors  during 
period 

Balance — Net  Profit  (or  Loss)  for  the  period 


5.  If  no  inventories  of  material  on  hand  at  beginning  or  end  of  the  period 
have  been  taken,  and  if  no  reliable  data  as  to  the  cost  of  such  stock  are 
available,  the  amoirnt  of  profit  or  loss  for  that  period  cannot  be  determined. 
If,  however,  such  data  are  available,  especially  at  the  beginning  of  the 
period,  an  analysis  of  the  various  records,  by  way  of  contracts,  cash  receipts 
and  disbursements,  sales  and  purchase  records,  etc.,  should  produce  statements 
which  will  substantially  set  forth  the  financial  status  at  the  end  of  the 
period.   The  important  point  to  bear  in  mind  is  that  unless  the  net  worth  at 
the  beginning  of  the  period  under  consideration  is  an  ascertainable  fact,  the 
profit  or  loss  for  that  period  cannot  be  determined. 

Copyright,  1917,  The  Ronald  Press  Company 


1-29-5 

Answer  to  Question  83 — A  Trial  Balance  is  a  statement  as  of  a  certain  date 
of  all  open  accounts  in  a  ledger  kept  by  double  entry,  prepared  after  the 
books  of  a  concern  have  been  posted,  showing  in  two  parallel  money  columns 
either  the  total  of  the  debit  side  and  the  total  of  the  credit  side  of  each 
ledger  account,  or  the  difference  between  the  debit  eind  credit  sides  of  each 
ledger  account.   If  the  total  debit  column  equals  the  total  credit  column,  the 
trial  balance  is  said  to  be  "in  balance." 

A  trial  balance  "before  closing"  contains  all  ledger  accounts,  real  or 
nominal.   A  trial  balance  "after  closing"  contains  only  asset  and  liability 
accounts. 

A  Balance  Sheet  is  the  trial  balance  "after  closing"  with  the  assets,  lia- 
bilities, and  net  worth  so  summarized  as  to  set  out  clearly  the  financial 
condition  of  the  concern  at  a  particular  moment  of  time.   It  may  be  in  "state- 
ment" or  "account"  form. 

Answer  to  Question  84 — The  purpose  of  grouping  assets  and  liabilities  ac- 
cording to  their  nature  is  to  bring  out  clearly  the  relation  of  the  capital 
investment  to  fixed  property,  the  amount  of  assets  available  for  liquidating 
current  indebtedness,  etc. 

Answer  to  Question  85 — Two  ways  of  regarding  capital  and  revenue  expendi- 
tures may  be  given: 

1.  Capital  expenditures  are  expenditures  the  benefit  of  which  has  not  ex- 
pired at  the  end  of  the  fiscal  period  under  consideration,  while  revenue 
expenditures  are  those  the  benefit  of  which  has  expired  or  will  expire  before 
the  close  of  such  fiscal  period.  Under  this  classification,  capital  expendi- 
tures would  consist  of  the  capital  assets,  current  assets,  and  deferred  charges 
existing  at  any  one  moment  of  time,  this  moment  of  time  being  commonly  re- 
garded as  the  date  on  which  a  balance  sheet  is  prepared,  i.e.,  at  the  close  of 
a  fiscal  period.  Revenue  expenditures  would  consist  of  debit  nominal  ac- 
counts. 

2.  Capital  expenditures  are  expenditures  for  more  or  less  permanent  fix- 
tures of  the  business,  evidenced  on  the  balance  sheet  by  what  appears  normally 
under  the  caption  of  "Capital  Assets"  ;  while  revenue  expenditures  are  the 
current  expenditures  of  the  business  of  whatsoever  nature,  excluding  those 
made  for  permanent  assets.  Revenue  expenditures  would  thus  consist  of 
material,  labor,  and  other  expenses,  some  of  which  might  appear  on  the  balance 
sheet  under  the  headings  of  current  assets  and  deferred  charges,  while  the 
remainder  would  appear  in  profit  and  loss  accounts. 

The  differences  in  the  two  viewpoints  arise  chiefly  from  the  fact  that  in 
each  case  the  time  element  is  not  the  same.   In  the  first  instance  a  cross- 
section  of  the  business  is  taken,  presenting  as  capital  that  portion  of  ex- 
penditures made  for  the  benefit  of  the  future,  whether  "future"  is  considered 
as  days  or  years.   In  the  second  instance,  capital  expenditures  consist  only 
of  "aids  in  production";  that  is,  real  estate,  plant,  machines,  etc.,  whose 
usefulness  extends  to  some  indeterminable  point  in  the  future. 

Copyright,  1917,  The  Ronald  Press  Company 


1-29-6 
Answer  to  Question  86 — Receipts  and  Disbursements  are  transactions  involv- 
ing the  actual  transfer  of  cash,  whereas  the  terms  Income  and  Expenditures 
refer  to  the  entire  revenue  for  any  given  period,  either  collected  or  still  to 
be  collected,  and  the  total  obligations  incurred,  whether  paid  or  still  owing. 
It  would  be  noted  here  that  the  terms  Expense  and  Expenditure  do  not  carry  the 
same  meaning,  in  that  the  term  expenditure  is  more  comprehensive  since  it  may 
involve  the  purchase  of  capital  or  fixed  assets,  as  well  as  material  for  re- 
sale or  other  operating  factors.   If,  however,  payment  has  been  made  in 
settlement  of  either  of  such  obligations,  the  transaction  incident  to  payment 
thereof  will  constitute  a  disbursement.  Whether  the  payment  is  made  for  a 
property  asset  or  an  expense  item  is  immaterial.   If  the  cash  was  actually 
paid  out,  it  constitutes  a  disbursement. 

Answer  to  Question  87 — Goods  out  on  consignment  are  the  property  of  the 
consignor,  under  his  control  and  subject  to  his  orders.   Therefore,  the  record 
of  such  consignment  should  not  in  any  way  be  made  to  imply  a  sale  or  transfer 
of  title  to  the  consignee.   The  record  should  indicate  clearly  that  the  person 
charged  is  a  consignee,  not  a  customer;  and  the  credit  should  not  be  made  to 
the  Sales  account  for  the  goods  are  still  unsold. 

Answer  to  Question  88 — 

CONSIGNMENTS-OUTWARD  LEDGER  CONTROLLING  ACCOUNT 
DEBIT  WITH  CREDIT  WITH 

Invoice  cost  of  consignments  Advances  made  by  consignee,  at  the 

shipped,  at  the  same  time  credit-        same  time  debiting  Cash. 

ing  Purchases.  Net  proceeds  reported  by  consignee. 

Freight-out,  express,  and  other  at  the  same  time  debiting  Cash  or 

charges  on  shipment,  at  the  same        Consignee's  Personal  account. 

time  crediting  Cash  or  Accounts 

Payable. 
Profits  on  shipments,  at  the  same 

time  crediting  Profits  on  Con- 
signments-Outward or  Profit  and 

Loss. 

The  balance  of  the  account  will  be  a  debit,  representing  the  cost  (less  ad- 
vances) of  consignments  not  yet  closed  out. 

A  journal  is  ordinarily  provided  for  the  first  debit,  postings  to  the  con- 
trolling account  being  made  monthly.   In  the  detail  or  subsidiary  ledger  a 
separate  account  is  kept  with  each  consignment,  and  debit  and  credit  postings 
are  made  to  each  account  in  the  usual  way.   Separate  columns  for  the  control- 
ling account  should  be  provided  in  the  cash  receipts  and  disbursements  books, 
voucher  record,  general  journal,  etc. 


Copyright,  1917,  The  Ronald  Press  Company 


1-29-7 
Answer  to  Question  89 — 

CONSIGNMENTS-INWARD  LEDGER  CONTROLLING  ACCOUNT 
DEBIT  WITH  CREDIT  WITH 

Costs  of  Consignments-Inward  paid       Proceeds  from  sales  of  consign- 
by  the  consignee,  such  as  freight,       ments,  at  the  same  time  debiting 
express,  drayage,  etc.,  at  the  Cash  or  customers'  accounts, 

same  time  crediting  Cash. 

Advances  to  consignor,  at  the  same 
time  crediting  Cash. 

Profits  on  consignments  as  deducted 
on  account  sales,  at  the  same  time 
crediting  Profits  on  Consign- 
ments-Inward or  Profit  and  Loss. 

The  balance  of  the  account  will  be  a  credit  or  debit  and  will  represent  the 
excess  of  sales  over  advances  on  consignments  not  closed  out  or  the  excess  of 
advances  over  sales.   Since  the  balance  is  made  up  of  debit  and  credit  bal- 
ances in  the  subsidiary  ledger,  it  should  be  split  for  balance  sheet  purposes. 
The  total  of  debit  balances  will  appear  as  an  asset  and  the  total  of  credit 
balances  as  a  liability. 

Special  columns  should  be  provided  in  the  books  of  original  entry,  includ- 
ing the  sales  book. 

Answer  to  Question  90 — A  joint  venture  is  a  temporary  combination  of  two 
or  more  individuals,  firms,  or  corporations  for  the  purpose  of  undertaking 
some  particular  transaction. 

As  the  manager,  A  will  keep  account  of  the  venture  and  will  open  up  on  his 
books  an  account  with  the  venture,  also  accounts  with  each  of  the  venturers. 
When  B  advances  the  merchandise,  A  will  credit  his  account  and  debit  the  Ven- 
ture account  at  the  agreed  price.  As  C  collects  the  proceeds  A  will  debit  his 
account  with  C  and  credit  the  Venture  account.   All  the  proceeds  having  been 
accounted  for,  A  will  close  the  Venture  account,  crediting  the  personal  ac- 
counts for  the  proper  amount  of  the  profits  to  be  distributed.  A  will  then 
send  each  venturer  a  statement  of  the  venture,  indicating  the  amount  to  be  re- 
mitted by  C  to  A  and  B. 

Answer  to  Question  91 — There  are  three  methods  which  may  be  used  for  ac- 
cruing interest  on  notes  payable,  viz.: 

1.  Make  no  entry  until  the  interest  is  paid,  at  which  time  charge  the  pay- 
ment to  Interest  Expense  account.   This  method  is  very  simple  to  apply  but  it 
is  unsatisfactory  because  as  a  general  rule  the  interest  is  not  charged  to  the 
period  incurring  the  expense. 

2.  Interest  when  paid  is  charged  to  Interest  Expense.  At  the  end  of  each 
fiscal  period  take  up  the  accrued  interest  as  follows — 

-December  31- 
Interest  Expense  ^-..-. 

To — Interest  Accrued  ^— — 

To  take  up  accrued  interest  at  December  31. 

Copyright,  1917,  The  Ronald  Press  Company 


1-29-8 
At  the  beginning  of  the  next  fiscal  period  reverse  the  entry  as  follows: 

-January  1- 

Interest  Accrued  $ 

To — Interest  Expense  $ 

To  reverse  entry  at  December  31  taking  up  accrued 
interest  at  that  date. 

The  effect  of  this  procedure  is  to  charge  each  period  with  the  amount  of 
interest  accruing  during  that  period. 

3.  Under  this  plan  it  is  assumed  that  all  interest  payments  represent 
liquidation  of  liabilities  already  accrued.   Consequently  the  liability  is 
built  up  as  follows: 

(1) 

Interest  Expense  $ 

To — Interest  Accrued  $ 

To  take  up  interest  accruing  during  month  of . 


(2) 

Interest  Accrued  

To — Cash  

Interest  on paid. 

The  balance  in  the  Interest  Accrued  account  is  a  current  liability. 

Answer  to  Question  92 — The  reason  for  omitting  from  merchandise  inventory 
values  the  increase  in  market  value  over  the  cost  price  of  the  stock  on  hand 
is  that  to  take  up  such  increase  when  computing  the  results  from  operating 
would  have  the  effect  of  including  in  any  statement  of  earnings  an  amount  of 
profit  not  yet  realized.   Profits  are  not  realized  from  unsold  goods.   On  the 
other  hand,  if  the  market  value  of  goods  in  stock  is  less  than  the  purchase 
price,  then  a  loss  has  been  sustained,  in  that  such  goods  could  be  duplicated 
for  less  than  they  cost,  and  the  same  reasons  which  exclude  from  the  state- 
ment of  earnings  any  unrealized  profits,  also  require  that  all  losses  should 
be  taken  into  account  within  the  period  during  which  they  occurred.   Briefly, 
then,  the  rule  for  valuation  of  merchandise  inventories  is  "cost  or  market, 
whichever  is  the  lower."  The  accepted  principle  is  that  profits  should  not  be 
anticipated  and  all  probable  losses  should  be  provided  for. 

Answer  to  Question  93 — 

1.  All  receipts  can  be  deposited  and  all  disbursements  made  by  check  only. 

2.  Sifiall  items  can  be  paid  in  currency  and  the  total  of  such  payments  for 
a  period  represented  by  a  check  drawn  to  replenish  the  fund.   Control  over 
these  payments  is  secured  because  the  replenishing  of  the  cash  fund  calls  for 
an  inspection  of  the  petty  payments  to  date  by  an  executive,  thus  reducing  to 
a  minimum  the  opportunities  for  theft  of  cash  by  employees. 

The  amount  of  the  fund  will  always  be  represented  by  receipts  for  dis- 
bursements or  currency  in  the  hands  of  the  petty  cashier. 

Copyright,  1917,  The  Ronald  Press  Company 


1-29-9 
Answer  to  Question  94 — This  method  of  handling  cash  sales  affords  a  check 
on  the  amount  of  cash  to  be  accounted  for  by  the  cashier  from  this  source. 
The  charge  to  cash  sales  as  reported  by  the  sales  department  must  be  equalled 
by  the  amount  of  cash  received  from  cash  sales  as  reported  by  the  cashier. 
Any  difference  between  these  amounts  will  at  once  be  apparent  and  the  reason 
for  such  discrepancy  should  be  immediately  ascertained. 

Answer  to  Question  95 — The  chief  accounts  found  in  a  partnership  but  not 
in  a  corporation  are: 

1.  DRAWING  ACCOUNTS.   A  drawing  account  is  kept  with  each  partner  and  is 
charged  with  whatever  withdrawals  of  cash  or  merchandise  are  made,  and  cred- 
ited with  salary  and  interest  allowances  and  profits  for  the  period.   Some- 
times interest  is  charged  to  the  drawing  account  if  the  partnership  agreement 
provides  that  penalty  for  withdrawals  above  a  certain  amount.   The  balance  of 
the  drawing  account  may  be  a  debit  or  credit  and  is  usually  transferred  at  the 
end  of  a  period  to  the  capital  account  of  the  partner,  representing  the  net 
decrease  or  increase  of  the  investment  of  the  partner  during  the  period. 

2.  CAPITAL  ACCOUNTS.   Each  partner  has  his  own  capital  account  which  is 
credited  with  his  original  investment.   At  the  end  of  each  fiscal  or  account- 
ing period,  the  drawing  account  is  transferred  to  the  capital  account  which 
then  shows  the  book  value  of  the  partner's  investment  in  the  business  on  that 
date.   As  a  rule  no  other  entries  are  found  in  this  account  except  those  re- 
cording additions  to  or  withdrawals  of  investment. 

3.  LOAN  ACCOUNTS.   Partners  may  advance  amounts  to  their  enterprise  in  the 
form  of  temporary  loans  rather  than  capital  contributions.   The  account  is 
handled  like  any  note  payable  account  and  interest  thereon  may  be  charged  to 
the  Interest  account  and  credited  to  the  partner's  drawing  account. 

Answer  to  Question  96 — A  corporation  operates  under  the  authority  of  a 
charter  granted  by  the  state  under  whose  laws  it  is  incorporated. 

Answer  to  Question  97 — Unissued  stock  consists  of  that  part  of  the  total 
authorized  issue  of  capital  shares  which  has  not  been  issued  to  shareholders. 
They  may  or  may  not  be  subscribed  for. 

Treasury  stock  consists  of  shares  issued  and  fully  paid  for,  which  subse- 
quently are  returned  to  the  corporation  by  way  of  purchase,  gift,  or  for- 
feiture, and  not  cancelled. 

Unissued  stock,  or  rather  unsubscribed  stock,  does  not  represent  anything 
of  value,  but  is  simply  a  means  of  obtaining  value  through  sale  £ind  issuance, 
thus  creating  a  liability  equal  to  the  value  to  be  so  acquired.   Treasury 
stock,  however,  having  been  once  issued  and  fully  paid  for  and  subsequently 
surrendered  to  the  corporation,  is  an  asset  of  the  corporation  because  the 
amount  of  liability  for  the  authorized  issue  is  not  affected  in  case  such 
^tock  Is  again  sold. 


Copyright,  1917,  The  Ronald  Press  Company 


1-29-10 
Answer  to  Question  98 — When  treasury  stock  (carried  on  the  books  at  par) 
is  sold  for  an  amount  less  than  par,  the  difference  between  the  selling  price 
and  par  value  represents  a  discount  allowed  for  the  purpose  of  promoting  the 
sale,  and  should  be  charged  on  the  books  to  an  account  of  that  name  (Discount 
Allowed  on  Treasury  Stock),   This  account  should  ultimately  be  closed  into 
Surplus  account.   The  reasons  for  so  disposing  of  the  discount  account  are: 

1.  If  the  treasury  shares  were  acquired  through  gratuitous  donations  to 
the  corporation,  the  par  value  thereof  increased  the  surplus  or  decreased  the 
amount  of  the  deficit.  If  this  full  par  value  is  not  realized  it  is  neces- 
sary to  revise  the  amount  previously  credited  to  the  Surplus  or  Deficit  ac- 
count. If  the  credit  is  made  to  Capital  Surplus  when  the  stock  is  donated, 
the  discount  sustained  should  be  charged  to  that  account. 

2.  If,  however,  the  treasury  stock  was  acquired  through  purchase  (at  par), 
any  amount  less  than  par  value  which  may  have  been  accepted  for  such  stock  re- 
duces the  amount  of  any  surplus  which  may  then  exist.  If  there  be  no  surplus, 
then  such  discount  would  either  create  or  increase  the  amount  of  deficit. 

When  treasury  bonds  (carried  on  the  books  at  par  value)  are  sold  below 
par,  the  difference  between  par  value  and  the  selling  price  represents  dis- 
count allowed  to  the  purchaser,  and  should  be  charged  to  Discount  Allowed  on 
Treasury  Bonds,  and  spread  equitably  over  the  life  of  the  bonds.   If  the 
treasury  bonds  purchased  are  carried  at  cost,  the  amount  received  when  sold 
may  be  credited  to  the  purchase  account  and  the  difference  would  represent  the 
profit  or  loss  on  the  transaction. 

Answer  to  Question  99 — Bonds  represent  a  liability  for  money  borrowed,  the 
repayment  of  which,  together  with  interest,  must  be  made  within  a  definitely 
prescribed  time,  such  repayment  being  ordinarily  in  no  way  contingent  upon 
sufficiency  of  earnings,  except  in  so  far  as  the  value  of  security  for  the 
bonds  may  be  reduced  by  losses. 

Capital  stock,  however,  represents  money  or  property  contributed  by  way  of 
investment  in  the  enterprise  (not  loaned) ,  ordinarily  without  provision  for 
repayment  during  the  life  of  the  corporation.   Payment  of  interest  by  way  of 
dividends  on  capital  stock,  even  though  that  stock  be  "preferred,"  may  be  con- 
trolled by  the  board  of  directors  according  to  their  judgment  as  to  the  suffi- 
ciency of  the  profits  to  justify  a  dividend  payment. 

In  other  words,  the  proceeds  from  capital,  contributed  by  way  of  invest- 
ment, are  not  subject  to  withdrawal  during  the  ordinary  course  of  the  corpora- 
tion's activity,  whereas  loans  mature  at  predetermined  dates  and  constitute  a 
prior  claim  against  available  assets  (either  specific  or  general). 

Answer  to  Question  100 — Payment  of  interest  and  repayment  of  principal  on 
the  first-named  class  of  bonds  are  secured  by  a  mortgage  on  specific  property, 
either  real  estate  or  chattels,  which  may  be  sold  and  the  proceeds  used  to 
meet  the  amount  of  such  indebtedness  in  the  event  of  defaulted  payments. 

No  specific  property,  however,  is  pledged  as  security  for  payment  of 
either  pi*incipal  or  interest  in  the  case  of  income  bonds.  As  the  name  would 
indicate,  income  bonds  are  merely  contract  obligations  to  provide  out  of  the 
proceeds  from  net  income  a  fund  sufficient  to  redeem  such  bonds  at  maturity 
and  to  pay  the  interest  thereon  periodically  before  distributing  any  portion 
of  such  net  income  by  way  of  dividends.  In  the  event  of  dissolution,  volun- 
tary or  otherwise,  its  holders  have  no  preference  over  other  general  creditors. 

Copyright,  1917,  The  Ronald  Press  Company 


1-29-11 
Usually  no  specific  property  is  pledged  or  mortgaged  to  secure  payment  of 
either  principal  or  interest  on  municipal  bonds.   The  security  for  bonds  of 
this  class  lies  in  the  power  vested  in  the  municipality  to  levy  taxes  and  the 
right  of  bondholders  to  enforce  the  exercise  of  such  power. 

Answer  to  Question  101 — Any  proceeds  from  bond  sales  in  excess  of  the 
amount  for  which  the  bonds  must  be  redeemed  represent  a  premium  and  should  be 
credited  to  a  Premium  on  Bonds  account.   Payment  of  premiums  for  bonds  is 
prompted  by  the  high  rate  of  interest  offered  (security  for  principal  consid- 
ered), and  therefore  the  total  premium  of  $5,000  should  be  amortized  over  the 
life  of  the  bonds. 

Answer  to  Question  102 — Surplus  may  accrue  from  several  sources,  viz.: 

1.  Profits  from  operations,  withheld  from  distribution. 

2.  Donations  of  property  or  securities. 

3.  Sale  of  capital  stock  at  premium. 

4.  Writing  up  the  value  of  fixed  assets. 

Generally,  however,  any  surplus  which  has  accrued  from  any  of  the  three 
last-named  causes  is  not  immediately  available  for  dividend  purposes,  and 
should  be  stated  separately  in  the  accounts  and  designated  "Capital  Surplus." 

Answer  to  Question  105 — When  dividends  have  been  officially  declared,  the 
amount  thereof  should  at  once  be  charged  to  "Surplus"  and  credited  to  "Divi- 
dend Payable"  account.   This  is  essential  even  though  the  time  for  payment  be 
long  deferred.   A  dividend  once  declared  by  the  board  of  directors  assumes  the 
nature  of  a  direct  liability,  as  between  stockholder  and  corporation,  payment 
of  which  can  be  enforced  by  the  stockholders  then  of  record  ;  hence  the  ac- 
counts should  be  immediately  made  to  show  that  a  part  of  the  surplus  has  been 
appropriated  for  ultimate  payment  of  such  dividend. 

Answer  to  Question  104 — When  actual  profits  have  been  realized  the  direc- 
tors of  a  corporation  have  the  right  to  declare  dividends  equal  to  any  part  of 
such  profits,  whether  they  be  represented  by  cash  or  by  less  liquid  assets. 
The  question  as  to  borrowing  funds  so  as  to  pay  such  dividends  in  cash  is  one 
of  policy,  and  should  be  decided  according  to  the  judgment  of  those  parties 
vested  with  authority  for,  and  charged  with  the  responsibility  of,  formulating 
the  policy  for  financing  the  corporation's  various  activities  and  functions. 

Answer  to  Question  105 — A  reserve  for  depreciation  is  necessary  in  spite 
of  the  reasons  given,  since  the  purpose  of  the  reserve  is  to  charge  against 
the  profits,  period  by  period,  the  proper  loss  which  that  period  should  stand, 
a  capital  asset  being  eventually  used  up  in  operation  in  the  same  sense  that 
current  supplies  are  used  up  in  operation,  the  difference  being  one  of  time 
only. 

In  answer  to  the  two  arguments  presented,  it  may  be  said  that  operating 
efficiency  has  little  to  do  with  the  reserve  for  depreciation  that  may  be  nec- 
essary.  The  operating  efficiency  may  never  fall  below  70%,  yet  when  it 
reaches  that  point  the  machine  or  plant  may  have  to  be  scrapped,  due  to  the 
fact  that  its  operating  cost  is  too  high  and  its  productive  capacity  too  low 
for  the  purposes  of  the  business. 

Copyright,  1917,  The  Ronald  Press  Company 


1-29-12 
Answer  to  Question  106 — The  point  involved  here  relates  to  the  question  as 
to  whether  losses  from  bad  debts  should  be  charged  against  earnings  of  the 
period  during  which  such  debts  were  acquired  or  the  earnings  of  the  period 
during  which  such  losses  become  apparent  and  actual.   The  former  method  is  the 
more  conservative  of  the  two.   And  it  is  to  anticipate  such  losses  that  a  re- 
serve is  created  by  charging  Profit  and  Loss  account  each  period  with  the 
estimated  amount  of  the  accounts  which  in  the  course  of  liquidation  may  prove 
to  be  uncollectible.   Hence,  on  the  theory  that  the  amount  of  such  losses  has 
been  previously  charged  against  profits,  and  assuming  that  the  existing  re- 
serve is  ample,  the  proper  disposition  of  such  uncollectible  item  is  to  charge 
same  against  the  reserve  account.   The  entry  then  is: 

Reserve  for  Bad  Debts  |~ — 

To— Customers'  Account  ^  $ — 


Answer  to  Question  107 — A  reserve  set  aside  for  the  retirement  of  bonds  is 
but  a  temporary  device  to  indicate  the  portion  of  past  earnings  which  must  be 
kept  intact,  and  not  distributed  until  such  bonds  have  been  paid;  whereas  a 
reserve  for  depreciation  represents  the  estimated  portion  of  property  and 
equipment  cost  which  has  entered  directly  into  the  expense  of  operating  during 
previous  periods. 

The  difference  in  the  nature  of  these  two  classes  of  reserves  may  be  read- 
ily seen  from  the  ultimate  disposition  to  be  made  of  each  on  the  books.   A  Re- 
serve for  Retirement  of  Bonds  finally  reverts  to  the  Surplus  account,  but  a 
Reserve  for  Depreciation  goes  to  negative  the  book  value  of  assets,  the  depre- 
ciation of  which  is  provided  for  by  such  reserve. 

Answer  to  Question  108 — When  such  good-will  has  been  acquired  through  pur- 
chase, as  in  the  case  of  a  firm,  individual,  or  corporation  buying  the  busi- 
ness of  another  and  paying  therefor  an  amount  (either  in  cash  or  other  prop- 
erty) over  and  above  the  appraised  value  of  the  net  tangible  assets. 

An  amount  to  represent  good-will  may  also  be  proper]-y  recorded  in  the 
books  of  any  enterprise  when  the  value  thereof  has  been  realized  through  sale 
and  converted  into  assets,  the  nature  of  which  permits  of  their  distribution 
among  the  owners  of  the  net  worth. 

Ordinarily,  however,  it  is  not  considered  good  practice  to  set  up  in  the 
accounts  of  a  going  concern  any  amount  to  represent  the  value  of  its  own  good- 
will. 

Answer  to  Question  109 — When  the  average  earnings  of  an  enterprise  exceed 
the  ordinary  return  by  way  of  interest  on  the  capital  investment  (after  due 
allowance  is  made  for  proprietor's  services),  such  excess  earnings  denote  the 
existence  of  an  intrinsic  or  inherent  value,  quite  apart  from  that  value  rep- 
resented by  the  tangible  property  and  other  book  assets  directly  employed  in 
the  production  of  those  earnings. 

Occasion  often  arises  for  determining  and  expressing,  in  terms  of  dollars 
and  cents,  the  commercial  worth  of  that  inherent  factor,  as  in  the  case  of  the 
sale  of  the  enterprise,  or  when  an  interest  is  to  be  acquired  in  the  business 
by  parties  other  than  those  whose  capital  or  influence  is  responsible  for  the 
existence  of  such  value. 


Copyright,  1917,  The  Ronald  Press  Company 


1-29-13 

If  net  earnings  of,  say,  $10,000  are  made  annually  from  a  capital  invest- 
ment of  $40,000,  the  percentage  of  profit  is  25.   If  a  fair  normal  return  on 
capital  is  assumed  to  be  10%,  then  the  normal  earnings  would  be  10%  on  the 
$40,000  investment,  or  $4,000.   The  excess  earnings  of  $6,000  would  represent 
income  from  the  good-will  attaching  to  the  business  which  may  be  valued  at 
$60,000  as  shown  in  the  following  illustration: 

Total  Earnings  $10,000.00 

Deduct — Amount  equal  to  normal  interest  return  on  capital 

investment  at  10%  4,000.00 


Excess  Earnings  %   6,000.00 


If  $6,000  represents  10%  of  the  value  by  which  that  amount  was  produced, 
then  100%,  or  10  x  $6,000  =  $60,000,  would  represent  the  entire  value  to  be 
placed  on  that  factor  to  which  is  attributed  the  earnings  in  excess  of  the 
normal  rate  of  profit. 

To  capitalize  these  earnings  at  that  value  would  involve  setting  up  an  ac- 
count with  "Good-will"  (debit),  and,  correspondingly,  crediting  Surplus  ac- 
count.  Then,  if  capital  stock  is  to  be  issued  on  the  strength  of  such  value, 
the  book  entry  would  be: 

Surplus  $ 

To — Capital  Stock  $ 


Answer  to  Question  110 — A  consolidated  balance  sheet  does  not,  nor  does  it 
pretend  to,  represent  the  financial  condition  of  any  particular  corporation; 
or  in  fact  any  legal  entity  whatsoever.   It  is  a  statement  set  up  in  conven- 
tional balance  sheet  form  representing  the  true  financial  position  of  a  group 
of  companies  which,  from  a  practical  point  of  view,  are  in  reality  one  organi- 
zation.  In  the  preparation  of  such  a  statement  all  items  affecting  the  com- 
panies inter  se  are  eliminated,  so  as  to  present  their  financial  position  so 
far  as  the  public  is  concerned. 

Answer  to  Question  111 — A  perpetual  inventory  is  kept  for  the  purpose  of 
ascertaining  the  cost  of  goods  sold  (trading  concern)  or  of  goods  used  in  pro- 
duction (manufacturing).   To  this  end  appropriate  records  are  kept  which  may 
consist  simply  of  quantities  received  and  quantities  given  out  and  balance  on 
hand  in  each  class  of  stock  or  of  raw  materials.   In  some  businesses,  for  in- 
stance, a  trading  concern  dealing  in  notions,  the  expense  of  keeping  perpetual 
inventory  records  would  be  all  out  of  proportion  to  the  advantages  derived. 
In  other  businesses  .the  recording  of  goods  sold  by  description  may  be  a  simple 
matter.   The  setting  down  of  prices  may  be  unnecessary  and  impracticable  where 
purchases  are  made  on  fluctuating  terms.   The  chief  advantages  to  a  manufac- 
turing concern  of  keeping  a  perpetual  inventory  record  are  usually  enumerated 
as  follows: 

1.  To  enable  the  determination  of  monthly  profits  without  a  physical  count 
of  the  goods  on  hand.   However,  the  amount  per  books  is  customarily  verified 
at  least  once  a  year  by  taking  a  physical  inventory. 

Copyright,  1917,  The  Ronald  Press  Company 


1-29-14 

2.  To  prevent  fraud  and  to  insure  careful  handling  on  the  part  of  store- 
keeper who  must  account  for  the  materials  under  his  charge. 

3.  To  assure  "maximum"  and  "minimum"  quantities  necessary  for  the  proper 
operation  of  the  factory. 

A  controlling  account  is  a  condensed  summary  of  all  transactions  posted  in 
detail  in  a  subsidiary  ledger.   This  reduces  the  volume  of  work  on  the  general 
ledger  so  that  only  the  head  bookkeeper  is  familiar  with  the  results  from  op- 
erations.  It  can  be  balanced  independently  of  the  other  ledgers,  thus  en- 
abling the  bookkeeper  to  prepare  financial  statements  on  short  notice.   It 
also  enables  the  head  bookkeeper  to  control  the  work  of  his  assistants  and  by 
localizing  errors  to  a  particular  ledger  the  labor  of  locating  them  is  mini- 
mized. 

From  this  description  it  is  obvious  that  the  general  ledger  accounts  kept 
in  connection  with  perpetual  inventories  are  controlling  accounts. 

Answer  to  Question  112 — 

1.  A  fixed  percentage  applied  on  a  flat  basis.   If  an  asset  has  a  cost 
value  of  $2,000  and  an  estimated  scrap  value  of  $200,  the  difference  of  $1,800 
must  be  charged  off  during  the  life  of  the  asset.   Assuming  an  estimated  life 
of  ten  years,  one-tenth  of  $1,800,  or  $180,  must  be  written  off  annually. 
This  is  equivalent  to  9%  on  the  original  cost,  or  10%  on  the  total  deprecia- 
tion to  be  provided  for. 

2.  A  fixed  percentage  applied  on  the  diminishing  value.  Assuming  the 
above  facts,  20.57%  must  be  charged  off  annually.   A  rate  is  ascertained  which 
if  applied  on  the  original  cost  and  on  the  diminished  value  thereof,  annually 
will  reduce  the  book  value  of  the  asset  to  its  estimated  scrap  value  at  the 
end  of  its  estimated  life, 

3.  Production.   The  estimated  quantity  of  production  during  the  estimated 
life  of  the  asset  is  divided  by  the  cost  of  the  asset  less  its  residual  value 
to  determine  the  amount  per  unit  of  production  to  be  provided.   This  method  is 
limited  to  cases  where  the  depreciation  accruing  is  closely  related  to  the 
volume  of  production. 

Answer  to  Question  113 — The  voucher  system  as  generally  used  at  the  pres- 
ent time  comprises: 

1.  Voucher 

2.  Check  or  voucher  check 

3.  Voucher  register  , 

4.  No  creditors'  accounts 

5.  Index  to  vouchers 

Under  the  voucher  system  no  disbursement  c£in  be  made  until  a  voucher  is 
prepared.   This  voucher  contains  all  the  details  of  the  transaction,  shows  the 
distribution  of  charges  and  credits,  and  bears  the  approvals  referred  to  in 
answer  to  Question  114.   Vouchers  are  kept  in  "Unpaid  Vouchers"  file  until 
ready  for  payment. 

Copyright,  1917,  The  Ronald  Press  Company 


1-29-15 

A  voucher  may  be  paid  by  ordinary  bank  check  or  by  voucher  check.   The 
latter  consists  of  an  ordinary  bank  check  form  together  with  a  summary  of  the 
details  shown  on  the  voucher.   Sometimes  a  voucher  proper  is  not  kept,  the 
voucher  check  containing  all  details  and  serving  as  a  voucher  until  issued. 
In  the  latter  case  it  bears  two  serial  numbers:  first  the  voucher  series,  and 
secondly  the  cash  book  series. 

The  voucher  register  is  a  journal  containing  all  the  necessary  columns  to 
distribute  properly  the  charges  and  credits  indicated  on  the  voucher.   Usually 
credit  columns  appear  for  "Audited  Vouchers"  (controlling  account)  and  "Dis- 
count on  Purchases,"  and  a  debit  column  for  each  numerous  class  of  charges 
with  one  column  for  miscellaneous  charges.   Postings  made  monthly.   The  mis- 
cellaneous column  is  posted  in  detail  but  only  the  footing  of  each  special 
column  need  be  posted.   In  addition  columns  are  provided  for  voucher  number, 
party  to  whom  issued,  date  paid  or  check  number  by  which  paid. 

An  account  with  each  individual  creditor  need  not  be  kept,  although  this 
is  often  done.   If  individual  accounts  are  not  kept  an  index  is  essential.   A 
card  is  prepared  for  each  creditor  showing  the  number  of  each  voucher  issued 
to  him  and  the  amount  thereof.   By  this  means  all  vouchers  relating  to  an  ac- 
count can  be  assembled  when  necessary.   Oftentimes  an  additional  copy  of  the 
voucher  is  made,  to  be  filed  alphabetically  and  thus  serve  as  the  index.   The 
unpaid  vouchers  constitute  the  current  accounts  payable. 

The  voucher  system  is  best  adapted  to  those  concerns  which  pay  their  in- 
voices in  full  when  due,  and  where  frequent  reference  to  creditors'  accounts 
is  not  required.   But  where  payments  are  continually  made  on  account,  or  where 
constant  reference  to  the  creditor's  account  is  a  necessity,  the  advantage 
lies  in  keeping  a  ledger  account  with  each  creditor.   In  some  cases  credi- 
tors* accounts  are  divided,  one  part  kept  on  the  first-mentioned  basis  and  the 
others  on  the  latter  basis. 

Answer  to  Question  114 — 

(a)  The  0.  K.  of  the  receiving  clerk  or  stock  clerk  as  to  receipt  of  goods 
of  proper  quality. 

(b)  The  0.  K.  of  the  purchasing  agent  that  the  goods  are  as  ordered  and 
that  the  terms  are  correct  as  to  dating,  discount,  freight,  etc. 

(c)  That  the  extensions  and  footings  of  the  invoice  are  correct. 

The  head  of  the  accounting  department  approves  the  voucher  as  a  whole,  and 
the  general  manager  or  other  authorized  official  approves  the  payment  thereof. 


Copyright,  1917,  The  Ronald  Press  Company 


COMPLETE  ACCOUNTING  COURSE— PART  I 


Lecture  30 


GENERAL  REVIEW 


Solution  to  Assignment  1-28-1 


ENTRIES  TO  CLOSE  THE  BOOKS  OF  THE 
MILLER  MOTOR  CAR  CO.,  JUNE  30,  19— 


1-30-1 


(1) 
Depreciation  (Manufacturing) 

To — Reserve  for  Depreciation  of  Buildings 
Provision  for  month  of  June  at  2%  per  annum. 


116.67 


$   116.67 


(2) 
Depreciation  (Manufacturing)  1,380.03 

To — Reserve  for  Depreciation  of  Machinery 
Provision  for  month  of  June  at  10%  per  annum. 


1,380.03 


.  (3) 
Depreciation  of  Delivery  Equipment 

To — Reserve  for  Depreciation  of  Delivery 
Equipment 
Provision  for  month  of  June  at  15%  per  annum. 


21.88 


21.88 


(4) 
Depreciation  of  Office  and  Warehouse  Fixtures 

To — Reserve  for  Depreciation  of  Office  and 
Warehouse  Fixtures 
Provision  for  month  of  June  at  6%  per  annum. 


10.23 


10.23 


(5) 


Bad  Debts 

To — Reserve  for  Bad  Debts 
^  of  gross  sales  for  June. 


1,449.63 


1,449.63 


(6) 


Taxes 

To — Taxes  Accrued 
Teixes  accrued  during  June. 


285.67 


285.67 


Copyright,  1917,  The  Ronald  Press  Company 


(7) 
Bond  Interest 

To — Bond  Interest  Accrued 
Accrued  during  June,  viz.:  5%  Bonds  $625; 
6%  Bonds  $375;  total  $1,000. 


$  1,000.00 


1-30-2 


$  1,000.00 


Miscellaneous  Selling  Expenses 
To — Rent  Paid  in  Advance 
Rent  expired. 


(8) 


50.00 


50.00 


(9) 


Insurance 

To — Unexpired  Insurance 
Insurance  expired. 


76.67 


76.67 


(10) 
Interest  Accrued  on  Notes  Receivable 
To — Interest  Received 
Interest  accrued  but  not  due. 


315.92 


315.92 


(11) 
Interest  Paid 

To — Interest  Prepaid 
To  write  off  prepaid  interest  on  bank  loan. 


200.00 


200.00 


(12) 
Discount  on  Sales  of  Finished  Parts 
To — Reserve  for  Discounts 
Reserve  for  discounts  to  be  taken  by  customers. 


1,800.00 


1,800.00 


(13) 
Inventory  of  Miscellaneous  Supplies 
To — Heat,  Light,  and  Power 
Stationery  and  Printing 
Inventory  of  supplies  on  hand  at  June  30. 


3,600.00 


3,500.00 
100.00 


(14) 


Inventory  of  Raw  Materials 

To — Purchases  Raw  Materials 
To  close  latter  account. 


16,767.44 


16,767.44 


(15) 
Work  in  Progress 

To — Inventory  of  Raw  Materials 
Raw  materials  requisitioned  during  June. 


18,897.04 


18,897.04 


Copyright,  1917,  The  Ronald  Press  Company 


(16) 


Inventory  of  Finished  Parts 

To — Purchases  Finished  Parts 
To  close  latter  accoimt. 


$66,523.13 


1-30-3 


$66,523.13 


(17) 
Work  in  Progress 
Cost  of  sales — Finished  Parts 

To — Inventory  of  Finished  Parts 
Finished  parts  requisitioned  during  June. 


45,109.16 
25,724.33 


70,833.49 


(18) 
Work  in  Progress 

To — Direct  Labor 
Indirect  Labor 
Heat,  Light,  and  Power 
Repairs — Plant  and  Equipment 
Royalties 
Shop  Supplies 
Depreciation 
Insurance 
Taxes 

Miscellaneous  Factory  Expense 
To  close  manufacturing  accounts. 


73,141.13 


39,901.98 

21,171.14 

5,459.75 

3,309.60 

600.00 

683.85 

1,496.70 

76.67 

285.67 

155.77 


(19) 
Inventory  of  Automobiles 

To — Work  in  Progress 
To  transfer  cost  of  cars  made  during  June. 


142,725.39 


142,725.39 


(20) 
Cost  of  Sales — Automobiles 

To — Inventory  of  Automobiles 
To  transfer  cost  of  cars  sold  during  June. 


175,543.64 


175,543.64 


(21) 
Sales — Automobiles 

To — Automobile  Trading  Account 
To  close  Sales  account. 


235,385.00 


235,385.00 


(22) 
Automobile  Trading  Account 

To — Allowcuice  on  Sales — Automobiles 
Cost  of  Sales — Automobiles 
To  close  accounts. 


177,397.64 


1,854.00 
175,543.64 


(23) 
Sales — Finished  Parts 

To — Finished  Parts  Trading  Account 
To  close  Sales  account. 


39.191.08 


39,191.08 


Copyright,  1917,  The  Ronald  Press  Company 


1-30-4 


(24) 
Finished  Parts  Trading  Account  $32,767.59 

To — Allowances  on  Sales — Finished  Parts  $  2,052.75 

Discount  on  Sales — Finished  Parts  4,990.51 

Cost  of  Sales — Finished  Parts  25,724.33 

To  close  latter  accounts. 

(25) 

Automobile  Trading  Account  57,987.36 

Finished  Parts  Trading  Account  6,423.49 

To — Profit  and  Loss  Account  64,410.85 

To  transfer  gross  profit. 

(26) 
Profit  and  Loss  Account  33,309.12 

To — Salesmen's  Salaries  6,491.00 

Salesmen's  Traveling  Expenses  837.00 

Advertising  25,647.25 

Delivery  Equipment  Maintenance  108.54 

Delivery  Equipment  Depreciation  21.88 

Miscellaneous  Selling  Expenses  203.45 
To  close  selling  expense  accounts. 

(27) 
Profit  and  Loss  Account  5,881.86 

To — Officers'  Salaries  2,500.00 

Office  Salaries  1,328.25 

Stationery  and  Printing  593.75 

Depreciation  of  0.  &  W.  Fixtures  10.23 

Bad  Debts  1,449.63 

To  close  general  administrative  expense  accounts. 

(28) 
Discounts  on  Purchases  1,129.82 

Interest  Received  717.43 

To — Profit  and  Loss  Account  1,847.25 

To  close  miscellaneous  income  accounts. 

(29) 
Profit  and  Loss  Account  1,222.94 

To — Interest  Paid  222.94 

Bond  Interest  1,000.00 

To  close  latter  accounts. 

(30) 
Profit  and  Loss  Account  25,844.19 

To — Surplus  25,844.19 

To  transfer  surplus  net  profits  for  June* 


Copyright,  1917,  The  Ronald  Press  Company 


MILLER  MOTOR  CAR  CO. 
BALANCE  SHEET,  JUNE  30,  19— 

ASSETS 


1-30-5 
Exhibit  A 


CAPITAL  ASSETS: 
Land 

Buildings 
Machinery,  Tools,  and 

Equipment 
Office  and  Warehouse 

Fixtures 
Delivery  Equipment 

COST 
$  40,000.00 
70,000.00 

165,603.50 

2,045.00 
1,750.00 

RESERVE  FOR 
DEPRECIATION 

PRESENT 
VALUE 
$  40,000.00 
69,800.00 

163,390.14 

2,027.52 
1,706.24 

#- 

200.00 

2,213.36 

17,48 
43.76 

$279,398.50 

$ 

2,474.60 

$276,923.90 
66,000.00 

Good-will 

C  CO. 

$342,923.90 

INVESTMENT  IN  DURANT  TRUCF 

200,000.00 

CURRENT  ASSETS: 
Inventories: 
Automobiles 
Finished  Parts 
Work  in  Progress 
Raw  Materials 
Coal 
Stationery  and  Printing 

Accounts  and  Notes  Receivable: 
Customers'  Accounts 
Notes  Receivable 
Accrued  Interest  on  Notes  Receivable 


$  30,550.00 

18,463.72 

26,132.11 

3,740.80 

3,500.00 

100.00  $  82,486.63 


$104,013.40- 

116,003.00 

315.92 

$220,332.32 


Deduct — Reserves  for: 
Bad  Debts 
Discounts 

CASH: 

Cash  In  Bank 
Petty  Cash  Fund 

DEFERRED  CHARGES: 

Advances  to  Salesmen 
Unexpired  Insurance 
Rent  Paid  in  Advance 
Discount  on  Stock 


$1,522.75 
1,800.00 


3,322.75   217,009.57 


$  50,186.45 
500.00 


50,686.45   350,182.65 


2,000.00 
766.66 
100.00 

2,000.00 


TOTAL  ASSETS 

Copyright,  1917,  The  Ronald  Press  Company 


4,866.66 
$897,973.21 


1-30-6 


LIABILITIES 
CAPITAL  STOCK: 

7%  Preferred — Authorized  and  Issued  (1,000 

shares,  par  value  |100  each)  $100,000.00 

Common — Authorized  (5,000  shares, 

par  value  |100  each)  $500,000.00 


Issued  and  Outstanding  433,900.00   $533,900.00 


BONDED  INDEBTEDNESS: 

5%  First  Mortgage  Bonds  $150,000.00 

6%  First  Mortgage  Bonds  75,000.00   225,000.00 


CURRENT  LIABILITIES: 

Audited  Vouchers  $  60,144.12 

Accrued  Liabilities: 

Pay-roll  $  41,649.55 

Bond  Interest  4,625.00 

Taxes  2,295.34    48,569.89   108,714.01 


SURPLUS : 

Balance,  June  1  $  7,265.02 

Add — Profits  for  June  (as  per  Exhibit  B)  25,844.18 


$  33,109.20 


Deduct — Dividends  Declared  and  Paid 

Preferred  Stock  1.75%        $  1,750.00 

Common  Stock    1.00%  1,000.00     2,750.00    30,359.20 


$897,973.21 


Copyright,  1917,  The  Ronald  Press  Company 


1-30-7 
Exhibit  B 


MILLER  MOTOR  CAR  CO. 

STATEMENT  OF  PROFITS  AND  INCOME 

MONTH  ENDING  JUNE  30,  19— 


GROSS  SALES 


DEDUCT — Allowances 

DiscouQt  on  Sales 


FINISHED 
AUTOMOBILES     PARTS      TOGETHER 
$235,385.00  $39,191.08  .  $274,576.08 


1,854.00  $  2,052.75  $  3,906.75 
4,990.51     4,990.51 


1,854.00   $  7,043.26  |  8,897.26 


NET  SALES  $233,531.00  $32,147.82  $265,678.82 

DEDUCT— Cost  of  Sales  (Exhibit  C  and  D)     175,543.64   25,724.33   201,267.97 

GROSS  PROFIT  ON  SALES  $  57,987.36  $  6,423.49  $  64,410.85 


DEDUCT— SELLING  AND  GENERAL  EXPENSES: 
Selling  Expenses  (Exhibit  E) 
General  and  Administrative  Expenses  (Exhibit  F) 

NET  PROFITS  FROM  OPERATIONS 

ADD— MISCELLANEOUS  INCOME: 
Discoiint  on  Purchases 
Interest  Received 


DEDUCT— INTEREST  CHARGES: 
Bond  Interest 
Other  Interest  Paid 

SURPLUS  NET  PROFITS  (carried  to  Exhibit  A) 


$33,309.12 

5,881.86  $  39,190.98 


$  1,129.82 
717.43 


$  1,000.00 
222. 94 


$  25,219.87 

1,847.25 
$  27,067.12 

1,222.94 
$  25,844.18 


Copyright,  1917,  The  Ronald  Press  Company 


1-30-8 
Exhibit  C 
MILLER  MOTOR  CAR  CO. 
STATEMENT  SHOWING  COST  OF  AUTO  SALES 
MONTH  ENDING  JUNE  30,  19— 


MATERIALS : 

Raw  Materials: 

Inventory,  June  1  $  5,870.40 

Purchases  16,767.44 


.  $22,637.84 
Less — Inventory,  June  30  3,740.80  |18,897.04 


Finished  Parts  45,109.16  $  64,006.20 


DIRECT  LABOR  39,901.98 

FACTORY  EXPENSES: 

Indirect  Labor  $21,171.14 

Heat,  Light,  and  Power  5,459.75 

Repairs — Plant  and  Equipment  3,309.60 

Royalties  600.00 

Shop  Supplies  683.85 

Depreciation  1,496.70 

Insurance  76.67 

Taxes  285.67 

Miscellaneous  Factory  Expenses  155.77    33,239.15 


TOTAL  MANUFACTURING  COST  $137,147.33 

ADD — Decrease  in  Inventory  of  Work  in  Progress: 

Inventory,  June  1  $31,710.17 

Inventory,  June  30  26,132.11     5,578.06 


COST  OF  AUTOMOBILES  MANUFACTURED  $142,725.39 

ADD — Decrease  in  Inventory  of  Automobiles: 

Inventory,  June  1  $63,368.25 

Inventory,  June  30  30,550.00    32,818.25 


COST  OF  AUTOMOBILES  SOLD  (carried  to  Exhibit  B)  $175,543.64 


Copyright,  1917,  The  Ronald  Press  Company 


MILLER  MOTOR  CAR  CO. 
COST  OF  FINISHED  PARTS  SOLD 
MONTH  ENDING  JUNE  30,  19— 


INVENTORY,  June  1 
ADD — Purchases 


DEDUCT — Finished  Parts  Used  in  Production 
Inventory,  June  30 


$45,109.16 
18,463.72 


1-30-9 
Exhibit  D 


COST  OF  FINISHED  PARTS  SOLD  (carried  to  Exhibit  B) 


$22,774.08 
66,523.13 

$89,297.21 

63,572.88 

$25,724.33 


Exhibit  E 


MILLER  MOTOR  CAR  CO. 

SELLING  EXPENSES 

MONTH  ENDING  JUNE  30,  19— 


Salesmen's  Salaries 

Salesmen's  Traveling  Expenses 

Advertising 

Delivery  Equipment  Maintenance 

Delivery  Equipment  Depreciation 

Miscellaneous  Selling  Expenses 


TOTAL  SELLING  EXPENSES  (Exhibit  B) 


$  6,491.00 

837.00 

25,647.25 

108.54 

21.88 

203.45 

$33,309.12 


Exhibit  F 


MILLER  MOTOR  CAR  CO, 

GENERAL  AND  ADMINISTRATIVE  EXPENSES 

MONTH  ENDING  JUNE  30,  19— 

Officers*  Salaries 

Office  Salaries 

Stationery  and  Printing 

Bad  Debts 

Depreciation  of  Office  and  Warehouse  Fixtures 

TOTAL  GENERAL  ADMINISTRATIVE  EXPENSES  (Exhibit  B) 


$  2,500.00 

1,328.25 

593.75 

1,449.63 

10.23 

$  5,881.86 


Copyright,  1917,  The  Ronald  Press  Company 


FORMS  FOR  COMPLETE  ACCOUNTING  COURSE 

Andersen 

PART  r 

This  package  contains  the  following: 

2  sheets    Form  1    Day  Book 
4    "      Form  2    Journal 

7    "      Form  3    Record  of  Journal  Entries 
12    "      Form  4      "    "     "       " 

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2    "      Form  6    Record  of  Returned  Sales 

2  "      Form  7    Record  of  Purchases 

6  "  Form  8  Record  of  Audited  Vouchers 

6  "  Form  8a  Manufacturing  Expenses 

4  "  Form  9  Cash  Dishursements 
6  "  Form  10  ••        " 

3  "      Form  11   Record  of  Cash  Receipts 
2    "      Form  12     "    "  Checks  Drawn 

9    "      Form  13   Ledger  one  account  to  the  page 
12    "      Form  14     "   two  accounts  to  the  page 
36    "      Form  15     "   three  accounts  to  the  page 


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Record  of  Purchases 


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Record  of  Audited  Vouchers 


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Record  of  Audited  Vouchers 


Month  of 


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No. 


Amount 


Discount 

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Distribution  of  Purchase: 

Raw  Finished 

Materials  Parts 


Record  of  Audited  Vouchers 


Month  of 


19 


Sheet  No. 


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Record  of  Audited  Vouchers 


Month  of 


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Amount 


Discount 

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Record  of  Audited  Vouchers 


Month  of 


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SELLING    EXPENSES 


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Record  of  Audited  Vouchers 


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SUNDRY    ACCOUNTS 

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Record  of  Audited  Vouchers 


Month  of 


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tier  oat« 

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Check 
No. 

Amount 

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Record  of  Audited  Vouchers 


Month  of 


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Record  of  Audited  Vouchers 


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Tl 


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Record  of  Audited  Vouchers 


Month  of 


19 


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SELLING  EXPENSES 


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Salesmen's  Travelino  a^.,— »i-,i-«  Misc. 

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SUNDRY    ACCOUNTS 


Account 


Record  of  Audited  Vouchers 


Month  of 


19 


Form  8 


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Name 


Detail  Check  Amount 

No. 


Discount 

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Purchases 


Distribution  of  Purchase 

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i       I 


Record  of  Audited  Vouchers 


Month  of 


19 


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Fo 


SELLING  EXPENSES 


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Record  of  Audited  Vouchers 


Month  of 


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Form  8 


''•''  Date 


Name 


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Detail 


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Discount        '    Distribution  of   Purchases 


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Form  8a 


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Record  of  Audited  Vouchers 


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Cash  Disbursements 


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Cash  Disbursements 


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Cash  Disbursements 


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Cash  Disbursements 


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Cash  Disbursements 


Form  9 


Cash  Disbursements 


Forn 


Cash  Disbursements 


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Cash  Disbursements 


Month  of 


19 


Form 

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Cuttomers 
Ledger 


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Discount 
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Month  of 


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Discount  on 
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Month  of 


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Bank 
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Month  of 


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Ill   feii 


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Month  of 


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Record  of  Cash  Receipts 


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COMPLETE  ACCOUNTING  COURSE— PART  II 


By 

ARTHUR  ANDERSEN,  B.B.A.,  C.P.A. 

Of  Arthur  Andersen  4  Co.,  Certified  Public  Accountants, 
Chicago,  New  York,  Milwaukee;  Professor  of  Accounting, 
Northwestern  University 


DAVID  HIMMELBLAU,  B.A. ,  B.B.A.,  C.P.A. 
Of  Arthur  Andersen  &  Co.  ;  Associate  Professor  of  Accounting, 
Northwestern  University 


ERIC  L.  KOHLER,  M.A. ,  C.P.A. 
Professor  of  Accounting,  Northwestern  University 


New  York 

THE  RONALD  PRESS  COMPANY 

1920 


Copyright,  1919,  The  Ronald  Press  Company 


COMPLETE  ACCOUNTING  COURSE— PART  II 
CONTENTS 


Lecture 

1  Statement  of  Affairs 

2  Special  Points  in  Partnership  Accounting 

3  Statement  of  Realization  and  Liquidation 

4  Capital  and  Revenue  Expenditures 

5  Depreciation 

6  Analysis  of  Profits 

7  Receiverships 

8  Branch  House  Accounting 

9  Distribution  of  Factory  Burden 

10  Estate  Accounts 

11  Balance  Sheet  Construction 

12  Statement  of  Application  of  Funds 

13  Profit  and  Loss  Construction 

14  Foreign  Exchange 

15  General  Review 

16  A  Survey  of  Auditing 

17  Cash  and  Cash  Funds 

18  Receivables 

19  Inventories 

20  Investments;  Deferred  Charges 

21  Fixed  Assets 

22  Intangible  Assets 

23  Current  Liabilities 

24  Funded  Debt  ;  Reserves 

25  Capital  Stock;  Surplus;  Profit  and  Loss  Account 

26  Contingent  and  Miscellaneous  Liabilities 

27  Consolidated  Balance  Sheets 

28  Closing  the  Audit ;  Reports 

29  Other  Kinds  of  Audits 

30  Review  Problems  and  Questions 


No.  of 
pages 
10 
6 
15 
14 
16 
14 
13 
12 
18 
19 
13 
13 
15 
11 
9 
14 
10 
16 
14 
16 
17 
13 
12 
16 
16 
16 
21 
14 
15 
27 


Copyright,  1919,  The  Ronald  Press  Company 


II-l-l 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  1 
STATEMENT  OF  AFFAIRS 


Problem  1  (For  Class  Work) 

The  firm  of  A  &  B  suspend  payment,  and  the  following  particulars  are  ob- 
tained from  their  books  as  of  December  31,  1918: 


ASSETS 


Real  Estate 

Buildings 

liachinery  and  Equipment 

Tools  and  Fixtures 

Inventories 

Customers'  Accounts 

Cash 


LIABILITIES 
Mortgage  obligation  on  Real  Estate,  Buildings, 

Machinery,  Equipment,  etc. 
Bills  Payable 
Trade  Creditors 
Partners'  Capital  Accounts: 


Balance  at 
Jan.  r^  1918 
$  80,000.00 
50,000.00 


Loss 
for  Year 
$38,712.50 
38,712.50 


$130,000.00  $77,425.00 


Book  Value 
\  33,000.00 
96,000.00 
82,800.00 
13,250.00 
95,250.00 
94,100.00 
3,175.00 


Expected 

to  Realize 

$  30,000.00 

60,000.00 

78,000.00 

9,000.00 

85,000.00 

85,000.00 

3,175.00 


$417,575.00  $350,175.00 


$125,000.00 

145,000.00 

95,000.00 


52,575.00 
$417,575.00 


Each  partner's  drawings  for  the  year  amounted  to  $10,000,  which  were  paid 
In  cash  and  absorbed  in  the  expenses  of  doing  business. 

Prepare : 

(a)  Statement  of  affairs 

(b)  Deficiency  account 


Copyright,  1919,  The  Ronald  Press  Company 


11-1-2 
Problem  2 

August  Miller,  of  the  firm  of  Miller  Brothers,  indorsed  notes  of 
Fred  Bentley  to  the  amount  of  $6,000.  Through  the  failure  of  Mr«  Bentley  to 
pay  the  same  when  due,  August  Miller  was  called  upon  to  meet  the  notes  and 
was  unable  to  do  so.  A  meeting  of  the  creditors  was  called  to  determine 
whether  further  credit  should  be  extended,  or  the  business  liquidated.  They 
requested  that  a  statement  of  affairs  be  prepared  showing  the  status  of  the 
business  as  a  liquidating  concern. 

The  following  balances  were  abstracted  from  the  books  of  Miller  Brothers, 
as  of  April  30,  1918:   Delivery  Equipment,  $1,750;  Warehouse  and  Office 
Fixtures,  $1,450;  Inventories — Merchandise,  $39,090,  Miscellaneous  Supplies, 
§300;  Advances  on  Consignments-Inward,  $1,100;  Customers'  Accounts,  $35,542; 
Notes  Receivable,  $10,100;  Cash  in  Bank,  $3,676.84;  Petty  Cash  Fund,  $100; 
Unexpired  Insurance,  $50;  Rent  Paid  in  Advance,  $200;  Notes  Payable,  $10,000; 
Accounts  Payable,  $36,080;  Notes  Receivable  Discounted,  $10,000;  Bank  Loan, 
$3,000;  Taxes  Accrued,  $200;  Fred  Miller — Capital,  $17,625.23;  August  Miller- 
Capital,  $16,417.61;  Interest  Accrued  on  Notes  Payable,  $36. 

In  going  over  these  accounts  the  partners  decided  that  the  delivery  equip- 
ment would  bring  $1,200,  and  the  fixtures  $625;  that  the  inventory  of 
merchandise,  while  in  good  condition,  would  realize  but  $25,000  on  forced  sale, 
and  miscellaneous  supplies,  $100.   Of  the  customers*  accounts,  $17,500  were 
good;  $11,800  were  doubtful  but  would  realize  50%;  $6,242  were  bad.  Of  the 
notes  receivable,  $10,000  were  good;  $100  were  bad;  advances  on  consignments- 
inward,  $1,000;  $173  was  due  for  wages. 

From  the  above  information  prepare  a  statement  of  affairs  and  a  deficiency 
account. 

Problem  3 

The  following  trial  balance  was  abstracted  from  the  books  of  the  firm  of 
D  &  E  as  of  June  30,  1919. 


D— Capital  Account 

E "      " 

D — Drawing  Account 

E —   "       " 

Real  Estate  and  Buildings 

Machinery  and  Fixtures 

Office  Furniture 

Merchandise  on  hand  January  1,  1919 

Merchandise  Account 

Freight  on  Purchases 

Wages 

Power,  Light,  and  Heat 

Miscellaneous  Factory  Expenses 

Insurance 

Discounts  Received  on  Purchases 

Sales  Account 

Discounts  Allowed  on  Sales 

Freight  Allowances  on  Sales 


$  32,113.29 
17,803.92 


2,500.00 

2,100.00 

3,700.00 

10,011.93 

990.62 

19,032.27 

88,090.58 

3,111.32 

8,111.03 

1,100.50 

3,400.03 

900.00 


2,100.75 
2,925.09 


1,301.03 
120,032.03 


Copyrights  1919,  The  Ronald  Press  Company 


II-1-3 

Office  Rent  900.00 

Traveling  Expenses  1,425.50 

Advertising  1,783.03 

Bad  Debts  Written  Off  854.83 

Sundry  Office  Expenses  1,103.92 

Office  Salaries  4,004.50 

Interest  Paid  on  Bills  Payable  1,403.27 

Inventory  of  Finished  Product  (at  January  1,  1919)  9,803.27 

Interest  Received  on  Bills  Receivable  442.37 

Trade  Creditors  19,803.04 

Bills  Receivable  9,800.00 

Customers'  Accounts  24,093.27 

Bills  Payable  10,000.00 

Rents  Collected  900.00 

Accrued  Interest  and  Taxes  to  June  30,  1919                        1,100.03 

Taxes  250.00 


$203,495.71  $203,495.71 


Under  the  partnership  agreement,  the  following  salaries  were. allowed: 
D,  $2,700;  E,  $2,100. 

The  partners'  capital  accounts  (calculated  on  the  beginning  balances) 
should  be  credited  with  interest  at  the  rate  of  6%  per  annum;  no  interest  is 
chargeable  on  the  withdrawals  during  the  year.  The  inventory  of  finished 
products  on  hand  at  June  30,  1919,  was  valued  upon  the  basis  of  the  approxi- 
mate cost  of  $20,103.98,  against  the  selling  value  of  $27,093.87.   The 
inventory  of  raw  material  was  also  valued  at  cost  and  totaled  $16,103.78. 

Prepare : 

(a)  The  journal  entries  necessary  to  close  the  books  at  June  30,  1919. 

(b)  Balance  sheet  at  June  30,  1919,  with  relative  manufacturing, 

trading,  and  profit  and  loss  accounts. 


MISCELLANEOUS  QUESTIONS 

Question  l~In  case  you  find  a  surplus  to  creditors  in  preparing  a 
statement  of  affairs  for  a  corporation,  how  would  you  arrange  the  last  section 
of  this  statement  (not  the  deficiency  account),  where  otherwise  the  details  of 
the  deficiency  to  stockholders  would  be  summarized?  In  your  answer  draw  up  a 
form  for  this  section  which  you  would  follow. 

Question  2 — The  M  S  Co.  suffers  a  large  loss  by  fire  (several  buildings 
and  considerable  merchandise)  only  partially  covered  by  insurance.  There  will 
be  additional  losses  if  liquidation  takes  place.  Draw  up  skeleton  deficiency 
account  which  you  would  expect  to  find  in  such  a  case. 

Question  3~A  small  trading  corporation  doing  an  exclusively  cash  business 
has  as  its  only  book  of  account  a  columnar  cash  book.  Columns  are  provided  on 
the  receipts  side  for  Sales  Department  A,  Sales  Department  B,  Return  Pur- 
chases, Miscellaneous,  and  First  National  Bank;  and  on  the  disbursements  side 

Copyright,  1919,  The  Ronald  Press  Company 


11-1-4 

for  Rent,  Light,  Postage,  Salaries,  Miscellaneous  Store  Expense,  Purchases 
Department  A,  Purchases  Department  B,  Discounts  on  Purchases,  Return  Sales, 
Miscellaneous,  Check  Number,  and  First  National  Bank,  Receipts  are  deposited 
intact,  sales  being  recorded  in  total  each  day  from  cash  register  footings. 
A  petty  cash  fund  serves  the  twofold  purpose  of  supplying  change  and  paying 
small  bills;  it  is  reimbursed  each  week  by  check.  There  are  no  accounts 
receivable  or  payable,  no  notes,  and  no  capital  assets. 
Discuss: 

(a)  The  question  as  to  the  adequacy  of  the  records. 

(b)  Whether  profit  and  loss  statements  and  balance  sheets  may  be 

properly  prepared  from  such  a  record, 

(c)  Whether  a  single-  or  double-entry  system  of  booldceeping  is  being 

followed. 

Question  4~In  what  order  should  the  accounts  in  a  general  ledger  be 
arranged? 

Question  5 — Distinguish  between  (a)  a  statement  of  receipts  £ind  disburse- 
ments and  (b)  a  statement  of  income  and  expenditure. 


Copyright,  1919,  The  Ronald  Press  Company 


Solution  to  Problem  1 


I 1-1-5 


A  &  B  PARTNERSHIP 
STATEMENT  OF  AFFAIRS 
DECEMBER  31,  1918 


Book 
Value 

%  3.175 
94,100 
95,250 

$192,525 


ASSETS 
CURRENT  ASSETS: 
Cash 

Customers*  Accts. 
Inventories 


Expected  to 
Realise 


$  3,175 
85,000 
85,000 

$173,175 


Gross 
Liabilities 


LIABILITIES 


Expected 
to  Rank 


$125,000  FULLY  SECURED  CREDITORS: 
Mortgage  Obligation 
(deducted  per  contra) 


PROPERTY  ASSETS: 

$ 

33,000 

Real  Estate 

$  30,000 

145,000 

96,000 

Buildings 

60,000 

95,000 

82,800 

Machy.  &  Equip. 

78,000 

13,250 

Tools  &  Fixtures 

9,000 

$177,000 

$225,050 


LESS — Mortgage  Ob- 
ligation there- 
against         125,000 


$  52,000 


$417,575  Total,  All  Assets   $225,175 
Deficiency  to  Credi- 
tors— carried  down  14,825 


$240,000 


UNSECURED  CREDITORS: 
Bills  Payable 
Trade  Creditors 


$365,000  Total  Liabilities 


$145,000 
95,000 


$240,000 


$240,000 


Deficiency  to  Part- 
ners $  67,400 


$417,575 


Deficiency  to  Credi- 
tors— brought  down  $  14,825 
Partners'  Capital 
52,575   Accounts  52,575 


$67,400   $417,575 


$  67,400 


Copyright,  1919,  The  Ronald  Press  Company 


II-1-6 


A  &  B  PARTNERSHIP 
DEFICIENCY  ACCOUNT 
DECEMBER  31,  1918 


20,000 


Loss  from  operations  for  the  year 
ending  December  31,  1918  (ex- 
clusive of  partners'  salaries)  $57,425 

Partners'  drawings  in  respect  of 
salary  for  the  year  ending 
December  31,  1918 

Loss  over  book  value  on  the 
realization  of  assets: 
Customers'  Accts.   $  9,100 


67,400 


Inventories 

10,250 

Real  Estate 

3,000 

Buildings 

36,000 

Machy.  &  Equip. 

4,800 

Tools  &  Fixtures 

4,250 

Capital  Investment  of 
A  &  B  at  January  1,  1918 

Balance — Deficiency  as 
per  statement  of  affairs 


$130,000 
14,825 


$144,825 


$144,825 


Copyright,  1919f  The  Ronald  Press  Company 


Book 
Value 


5 


5 


PORM  OF  STATEMENT  OF  AFFAIRS 
Gross 


ASSETS 

CURRENT  ASSETS: 

Cash 

Customers'  Accts: 

Good         3 

Doubtful  (50%)  

Bad  


Expected 

to 
Realize 


Liabili- 
ties 


LIABILITIES 


II-1-7 

Expected 

to 

Rank 


5 ^ 


$ 


I 


Notes  Receivable: 

Good         I 

Doubtful  (50%)  

Bad  


PREFERRED  CREDITORS: 

For  Taxes        $ 

"  Wages 

Deducted,  per 

contra         $— -- 


FULLY  SECURED  CREDITORS: 

(deducted — per  contra) 


$ 


Insurance  Unexpired 
Inventories  (less  stocks 
held  by  partially  se- 
cured creditors) 

Total  Current  Assets 

CAPITAL  ASSETS: 
Land 

Buildings 

Machinery  and  Tools 
Other  Equipment 


PARTIALLY  SECURED  CREDI- 
TORS: 

Amount  of  Lia- 
bility        $— 
DEDUCT — Securi- 
ty thereagainst 
(per  contra) 


DEDUCT — Fully  Secured 
Creditors  (per  contra) 

Total  Capital  Assets 

Total,  All  Assets 
DEDUCT — Preferred  Credit- 
ors (per  contra) 

Assets  available  for  divi- 
sion among  Creditors  sub- 
ject to  Realization  and 
Liquidation  Expenses 

Balance — Deficiency  to 
Creditors  carried  down 


UNSECURED  CREDITORS: 
Ordinary  Trade 

Accounts 
Notes  Payable 
Sundry  Accts, 


$ Total  Liabilities 


9 


Deficiency  to  Proprietors  $ 


Deficiency  to  Creditors 
brought  down 
—  Capital  Accounts 


« 


I 3 


Copyright,  1919,  The  Ronald  Press  Company 


II-1-8 


DEFICIENCY  ACCOUNT 


DEBIT  WITH 

Loss  from  shrinkage  in 
value  of  assets,  per 
statement  of  affairs: 
Customers*  Accounts 
Notes  Receivable 
Insurance  Unexpired 
Inventories 
Land 

Buildings 
Machinery  &  Tools 
Other  Equipment 


CREDIT  WITH 

Deficiency  as  per 

statement  of  affairs 
Original  Capital  contribution 

upon  the  part  of  (a)  single 

proprietor,  (b)  partners,  or 

(c)  stockholders 
Profits  from  operation  up  to 

the  date  of  liquidation 


Withdrawals  by  (a)  single 

proprietor,  (b)  partners,  or 
(c)  stockholders,  in  the 
shape  of  dividends 

Losses  from  operation  up 
to  the  date  of  liquidation 

Total  Debits 


Total  Credits 


STATEMENT  OF  AFFAIRS 

DEFINITION — Statement  showing  assets,  liabilities,  and  net  worth  of  a  concern 
at  a  particular  moment  of  time  on  a  liquidating  basis, 

PURPOSE— 

1.  To  set  forth  the  total  unsecured  claims  and  net  available  assets  from 

which  payment  can  be  made 

2.  To  set  up  the  proprietor's  equity  in  the  net  assets  on  a  forced 

liquidation  basis  in  case  of 

(a)  Bankruptcy 

(b)  Reorganization,  and 

(c)  Solvent  concern  desiring  unusual  credit 

FORA* — See  illustration, 

1.  "Book  Value"  is  sometimes  shown  contiguous  to  "Expected  to  Realize" 

column,  and  "Gross  Liabilities"  are  sometimes  shown  contiguous  to 
the  "Expected  to  Rank"  column, 

2.  Items  in  the  "Book  Value"  and  "Gross  Liabilities"  columns  should 

agree  with  the  balance  sheet  accounts. 


Copyright,  iyi9.  The  Ronald  Press  Company 


II-1-9 

EXPLANATION  OF  TERMS  USED— 

1.  BOOK  VALUE,  Represents  value  of  assets  as  shown  by  the  books  of  account. 

2.  EXPECTED  TO  REALIZE.  Estimated  amount  which  can  be  realized  on  forced 
sale  of  assets  and  liquidation  of  outstanding  liens  thereon. 

3.  GROSS  LIABILITIES.  Represent  the  liabilities  appearing  on  the  books  of 
account. 

4.  EXPECTED  TO  RANK,  Estimated  unsecured  claims  which  will  share  propor- 
tionately in  assets  not  subject  to  liens. 

5.  PREFERRED  CREDITORS.  Claims  such  as  rent  and  wages  which  by  law  must  be 
paid  in  full  out  of  any  available  assets  before  any  payment  is  made  on  unsecured 
claims. 

6.  FULLY  SECURED  CREDITORS.  Claims  having  a  lien  on  specific  assets  whose 
realisable  value  is  sufficient  to  settle  such  claims  in  full. 

7.  PARTIALLY  SECURED  CREDITORS.  Claims  having  a  lien  on  specific  assets  whose 
realizable  value  is  not  sufficient  to  settle  such  claims  in  full.  The  excess  of 
such  claims  over  the  realizable  value  of  the  assets  on  which  the  lien  is  held  is 
considered  unsecured. 

8.  UNSECURED  CREDITORS.  Claims  having  no  lien  on  specific  assets  and  pay- 
ment of  which  will  be  made  proportionately  out  of  the  net  free  assets, 

9.  NET  FREE  ASSETS.  Represents  the  total  amount  which  it  is  expected  will  be 
realized  from  the  assets  after  all  liens  are  settled,  and  after  claims  having  a 
legal  preference  are  paid. 

DIFFERENTIATED  FROM  A  BALANCE  SHEET  AS  TO— 

1.  PURPOSE: 

A  balance  sheet  shows  the  assets,  liabilities,  and  net  worth  as  a 
"going  concern"  ;  a  statement  of  affairs  shows  the  same  data  as  a 
"liquidating"  concern. 

2.  FORM: 

A  balance  sheet  is  arrsmged  to  show: 

(a)  Assets,  classified  as  between  fixed  and  current 

(b)  Liabilities,  classified  as  between  fixed  and  current 

(c)  Net  worth  of  proprietors,  showing  separately  the  net  income 

for  the  last  fiscal  period 
A  statement  of  affairs  is  arranged  to  show 

(a)  Net  free  assets 

(b)  Total  unsecured  creditors 

(c)  Amount  the  unsecured  creditors  may  expect  to  receive  on  their 

claims 

(d)  Deficiency  or  surplus  to  proprietors  after  all  liabilities 

are  liquidated 

Copyright,  1919,  The  Ronald  Press  Company 


II-l-lO 


DEFICIENCY  ACCOUNT- Condensed  statement  showing  the  causes  of  the  insolvency. 


REFERENCES : 

Kester,  Vol.  II,  pages  631-639 
Hatfield,  Chapter  XVIII 
Esquerre,  Chapter  XXXIX 


Copyright,  1919,  The  Ronald  Press  Company 


II-2-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  2 
SPECIAL  POINTS  IN  PARTNERSHIP  ACCOUNTING 


Prot)leni  4 

Jones  4  Smith  carried  on  a  business  together  with  plants  at  Seattle,  Wash., 
and  Portland,  Ore.,  each  having  sole  charge  of  a  plant.  The  partnership  agree- 
ment provided  that : 

1.  The  Seattle  partner's  salary  to  be  at  the  rate  of  $6,000  per  year  and 
the  Portland  partner's  salary  at  $2,500  per  year  plus  one-fourth 
of  the  net  profits  of  the  Portland  branch, 

2«  Interest  to  be  allowed  at  the  rate  of  5%  per  annum  on  the  capital  in- 
vested, which  amounted  to  $250,000,  of  which  $100,000  was  invested 
at  Seattle  and  $150,000  at  Portland, 

3,  Depreciation  at  5%  per  sinnum  to  be  written  off  Plant  account  and  all 

repair  and  renewal  charges  absorbed  in  the  Profit  and  Loss  account 
in  the  period  in  which  they  are  incurred.  The  investment  in  plant 
and  buildings  at  Seattle  was  $140,000  and  at  Portland  $210,000. 

4.  All  interest  charges  in  respect  of  borrowed  money  to  be  debited  against 

the  Profit  and  Loss  account  of  each  plant  in  the  proportion  of  two- 
fifths  to  Seattle  and  three-fifths  to  Portland,  The  charges  of  this 
nature  amounted  to  $6,750  for  the  year. 

The  profits  for  the  year  (before  taking  any  of  the  foregoing  items  into  con- 
sideration) totaled  $77,500,  of  which  $30,000  was  earned  by  the  Seattle  branch 
and  the  balance  by  the  Portland  branch. 

Prepare  a  statement  setting  out  the  net  profit  after  deducting  all  charges 
and  show  the  amounts  to  be  credited  to  each  partner's  account* 

Problem  5 

January  1,  1918,  A  &  B  signed  articles  of  copartnership  to  engage  in  a  mercan- 
tile business,  agreeing  to  invest  $15,000  and  $25,000,  respectively.   Profits 
were  to  be  divided  in  proportion  to  the  actual  original  capital  contributed,  and 
interest  at  5%  was  to  be  allowed  on  investments  in  excess  of  the  agreed  con- 
tributions and  was  to  be  charged  on  deficits  under  the  agreed  contributions. 

The  trial  balance  of  their  books  on  December  31,  1918,  was  as  follows: 


Copyright,  1919,  The  Ronald  Press  Company 


I 1-2-2 


A — Capital  Account 

B ••       ■ 

Purchases 
Office  Expenses 
Real  Estate 
Building 

Customers'  Accounts 
Cash  on  Hand 
Notes  Receivable 
Furniture  and  Fixtures 
Discounts  Received 
Creditors*  Accounts 
Salaries  and  Wages 
Notes  Payable 
Sales 


$  60,000.00 
1,000.00 
5,000.00 
10,000.00 
12,000.00 
1,000.00 
8,000.00 
2,000.00 


4,000.00 


9,000.00 
27,000.00 


1,000.00 
7,000.00 

4,000.00 
55,000.00 


$103,000.00   $103,000.00 


The  merchandise  inventory  on  hand  December  31,  1918,  was  valued  at  $10,000. 

After  allowing  for  interest  on  investments,  divide  the  net  profits  in  accord- 
ance with  the  agreement  and  submit  the  balance  sheet  as  of  December  31,  1918,  and 
also  a  statement  of  the  partners'  capital  accounts. 

Problem  6 

On  January  1,  1919,  a  third  party,  C,  desired  to  enter  the  partnership  referred 
to  in  Problem  5,  and  it  was  agreed: 

1»  That  C  pay  $9,000  in  cash  for  a  one-fourth  interest  in  the  new  concern. 

2.  That  the  good-will  of  A  &  B  be  valued  at  $3,000. 

3.  That  A  &  B  adjust  their  capital  accounts  in  accordance  with  C's  invest- 

ment so  that  they  hold  a  one-fourth  and  one-half  interest  respec- 
tively in  the  new  firm. 

4.  That  profits  and  losses  be  divided  according  to  actual  original 

capital  contributions. 

In  the  adjustment,  A  received  cash  (out  of  the  $9,000  paid  in  by  C)  for  his 
excess  investment,  while  B  received  the  remainder  of  the  $9,000  paid  in  by  C,  and 
the  balance  due  him  was  considered  a  loan  to  the  partnership  for  which  he  received 
a  note. 

Give  journal  entries  necessary  to  record  the  above  facts. 

MISCELLANEOUS  QUESTIONS 

Question  6 — In  making  an  analysis  of  the  Accounts  Receivable  controlling  ac- 
count for  the  month  of  January,  1918,  you  find  the  following  items.  Set  them  up  in 
account  form  and  close  the  account. 

Balance  January,  1918,  $5,000;  total  net  cash  receipts  per  cash  book,  $8,000; 
sales,  as  per  sales  record,  $15,000;  total  freight  and  other  allowances,  $120;  total 


Copyright,  1919,  The  Rcnald  Press  Company 


II-2-3 

of  customers  ledger  debit  column  in  the  journal,  $4,000;  cash  discounts  allowed 
per  cash  book,  $247.62;  total  notes  receivable  given  by  customers,  and  other 
journal  credits,  $1,250. 

Question  7 — A  company  is  using  the  imprest  system  of  handling  petty  cash  and 
plans  to  open  the  account  with  $200.  At  the  end  of  the  first  month  it  is  found 
that  the  petty  cash  disbursements  have  been  as  follows:  Postage  $14;  dinners 
$12;  advertising  $75;  car-fare  $9.20;  miscellaneous  general  expense  $7. 

Outline  the  procedure  to  be  followed  in  handling  the  fund  and  give  the  entries 
that  should  be  made  because  of  the  disbursements  and  replenishment  of  the  fund. 

Question  8 — Outline  the  entries  that  would  be  made  on  the  books  of  a  partner- 
ship to  record  its  sale  to  a  corporation. 

Question  9 — X  of  the  partnership  of  X  &  Y  borrows  money  for  the  purpose  of 
purchasing,  at  a  low  figure,  certain  merchandise  for  the  regular  requirements  of 
the  business.  He  pledges  certain  other  merchandise  on  hand  as  security  for  the 
note  and  turns  over  the  cash  realized.  Under  what  further  conditions  would  the 
cash  thus  received  by  the  business  be  credited  to  any  of  the  following  accounts: 

(a)  Notes  Payable 

(b)  Accounts  Payable 

(c)  X — Loan  Account 

(d)  X — Capital  Account 

Question  10 — In  preparing  a  statement  of  profits  with  a  view  of  setting  out 
the  earning  power  of  a  partnership,  which,  if  any,  of  the  following  items  should 
be  excluded  and  why;  (a)  interest  on  bonded  indebtedness,  bank  loans,  and  other 
indebtedness,  $52,500;  (b)  profit  arising  from  the  sale  of  property,  $5,000;  (c) 
settlement  in  connection  with  patent  litigation  extending  over  a  period  of  ten 
years,  $25,000;  (d)  management  salaries,  $100,000 ;  (e)  partnership  excess  prof its 
tax  for  1917,  $5,000;  (f )  interest  on  partners'  capital  accounts,  $15,000. 

PARTNERSHIPS 

Review  Lecture  6,  Part  I. 

Partnership  accounting  occasionally  offers  difficulties  which  may  be  classi- 
fied under  the  following  heads: 

INTEREST  ALLOWANCES — Interest  is  frequently  allowed  on  capital  accounts  or 
allowed  or  charged  on  drawing  accounts  in  order  that  due  credit  may  be  given  each 
partner  for  the  amount  of  capital  which  he  retains  in  the  business.  The  basis  for 
the  interest  credit  or  debit  will  be  found  in  the  partnership  agreement.  Some 
of  the  common  methods  of  computation  are  as  follows: 

1.  Interest  may  be  allowed  on  the  excess  of  salary  credits  or  other  credits 
or  amounts  over  drawings  or  charged  on  the  excess  of  drawings  over  stipulated 
sums.  For  example,  in  the  partnership  of  B  &  C  it  is  provided  (a)  that  interest 
computations  shall  be  made  at  the  end  of  each  month;  (b)  that  drawing  accounts 
will  be  credited  with  (1)  monthly  prof  its,  one-half  to  each  partner,  (2)  salary  al- 
lowances of  $500  for  B  and  $750  for  C,  (3)  additional  capital  contributions  or  losses 
during  the  month,  and  debited  with  all  drawings  of  whatever  kind  during  the  month; 

Copyright,  1919,  The  Ronald  Press  Company 


II-2-4 

(c)  that  interest  at  6%  will  be  computed  on  each  sum  as  of  the  date  contributed  or 
withdrawn  (including  the  opening  balance  at  the  beginning  of  the  month),  except 
that  in  the  case  of  the  credit  or  debit  of  monthly  profit  or  loss  and  the  credit 
of  monthly  salary,  one-quarter  of  1%   thereof  will  represent  the  interest  com- 
putation; (d)  that  the  difference  betv/eon  the  credit  and  debit  interest  items 
so  computed  will  be  the  basis  of  a  journal  entry  debiting  or  crediting  the  part- 
ners' drawing  accounts  and  crediting  or  debiting  "Interest — Partners'  Drawing 
Accounts"  account;  and  (e)  that  computations  will  be  made  on  the  basis  of  a  360- 
day  year  £ind  a  30-day  month.  Under  such  provisions  as  outlined  we  might  expect  to 
find  the  drawing  account  of  B  for  the  month  of  July,  1918,  somewhat  as  follows; 


B~DRAWING  ACCOUNT 

DATE   PARTICULARS  AMOUNT  INTEREST  DATE   PARTICULARS 
July  6  Cash       $400.00   $  1.67  July  1  Balance,  June 
"  27  Cash        700.00      .47    "  16  Additional 

Capital 

"  31  Salary,  July 


■  31  Net  Interest 

Credits 
"  31  Balance 

carried 

down    12,157.88 


34.67 


AMOUNT   INTEREST 
$  1,502.04   I  7.51 


10,000.00 
500.00 


"  51  Profits,  July     1,221.17 
"  31  Interest  per  contra   34.67 


$13,257.88   $36.81 


Aug.  1  Balance 


$12,157.88 


25.00 
1.25 

3.05 


$13,257.88   $36.81 


2.  Interest  on  capital  accounts  may  be  computed  for  the  entire  period  on  the 
balance  at  the  beginning  of  the  period.   To  continue  the  illustration  in  (1), 
it  might  be  expected  that  interest  would  be  credited  to  the  capital  accounts  at 
the  end  of  the  year  computed  on  the  balance  at  the  beginning  of  the  year,  inasmuch 
as  all  additions  thereto  or  subtractions  therefrom  had  been  taken  care  of  through 
the  drawing  accounts.  Often  interest  on  the  capital  accounts  at  the  beginning  of 
the  period  is  the  only  interest  on  the  partners'  accounts,  no  account  being  taken 
of  changes  during  the  year. 

In  no  case  should  interest  be  allowed  unless  the  partnership  agreement 
specifically  provides  therefor.   It  should  also  be  remembered  that  unless  the 
disparity  between  the  capital  accounts  and  the  profit-sharing  ratios  is  very 
great,  or  unless  the  capital  interest  is  very  large,  little  is  gained  by  com- 
puting interest  on  drawing  and  capital  accounts. 

DRAWING  ACCOUNTS — Drawing  accounts  are  commonly  credited  with  salary,  in- 
terest, profits,  and  other  allowances  and  debited  with  current  withdrawals, 
interest,  and  various  personal  charges.  On  the  other  hand,  each  of  the  above 
elements  may  be  carried  in  separate  accounts  and  consolidated  at  the  end  of  each 
accounting  period, 

CAPITAL  ACCOUNTS — The  original  investment  and  subsequent  profits  (i.e., 
capital  arid  surplus  in  the  case  of  a  corporation)  are  usually  consolidated  on 
the  books  of  a  partnership,  being  separated  only  as  to  partners.  It  has  become 


Copyright,  1919,  The  Ronald  Press  Company 


II-2-5 

the  practice  to  regard  each  partner's  prof  its  not  withdrawn  as  additional  invest- 
ment.  If  additional  cash  is  invested  by  a  partner  during  a  period  it  may  be  de- 
sirable to  credit  the  amount  to  his  drawing  account  in  order  to  preserve  the 
opening  balance  of  his  capital  account  intact  throughout  the  period.  Ordinarily, 
however,  capital  additions  and  capital  withdrawals  are  credited  or  debited 
directly  to  the  capital  accounts. 

GOOD-WILL — The  manner  in  which  good-will  may  be  placed  on  the  books  of  a  cor- 
poration or  partnership  in  case  of  purchase  is  described  in  Lecture  27,  Part  I. 
It  will  sometimes  happen  that  in  the  reorganization  of  a  partnership,  in  case  a 
new  member  is  taken  into  an  established  business,  or  for  other  reasons,  a  Good- 
Will  account  will  be  created,  the  credits  offsetting  the  debit  being  made  to  the 
capital  accounts  of  the  partners  already  in  the  business  on  the  basis  of  their 
profit  and  loss  sharing  ratios.  Or  the  partnership  agreement  may  provide  that 
upon  the  death  or  retirement  of  a  partner,  his  share  in  the  good-will  which  has  been 
created  as  a  result  of  his  efforts  shall  be  credited  to  his  capital  account.  A 
Good-Will  account  in  such  case  will  be  opened,  debiting  thereto  the  amount  cred- 
ited to  the  partner's  account,  an  entry  which  in  fact  records  a  purchase  of  good- 
will.  The  balance  of  the  good-will  computation  applying  to  the  remaining 
partners  would  not  ordinarily  be  put  on  the  books  unless  settlement  with  them 
is  contemplated. 

LIQUIDATING  DIVIDENDS  OF  A  PARTNERSHIP— When  a  partnership  is  dissolved,  the 
capital  accounts  should  be  reduced  by  the  first  liquidating  dividends  to  a  profit 
and  loss  sharing  ratio,  so  that  subsequent  dividends  may  be  distributed  without 
the  danger  of  overpaying  any  one  partner.  Thus  A,  B,  and  C  share  profits  and 
losses  one-third  each;  their  capital  accounts  are  $30,000,  $40,000,  and  $50,000 
respectively,  and  liquidating  dividends  of  $10,000,  $20,000,  and  $15,000  are 
distributed  in  order  on  successive  dates  as  follows: 

ABC         TOGETHER 
Balance  Capital  Accounts      $30,000.00  $40,000.00  $50,000.00   $120,000.00 
Dividend  #1  10,000.00     10,000.00 


$30,000.00  $40,000.00  $40,000.00   $110,000.00 
Dividend  #2  10,000.00   10,000.00     20,000.00 


$30,000.00  $30,000.00  $30,000.00   $  90,000.00 
Dividend  #3  (final)         5,000.00    5,000.00    5,000.00     15,000.00 


Balance  Net  Loss  from  Realiza- 
tion $25,000.00  $25,000.00  $25,000.00   $  75,000.00 


The  above  assumes  that  A,  whose  capital  account  is  the  lowest,  will  not  make 
good  any  capital  losses  in  excess  of  his  capital  investment.  Without  agreement 
to  the  contrary  this  assumption  should  always  be  made  ;  otherwise  the  partner  with 
the  greatest  invested  capital  may  be  the  loser.  To  illustrate,  suppose  A  had 
agreed  with  B  and  C  to  make  good  losses  exceeding  his  capital  account.  The  first 
dividend  would  then  be  distributed  $2,000  to  B  and  $8,000  to  C,  as  may  be  seen  from 
the  following! 

Copyright,  1919,  The  Ronald  Press  Company 


I 1-2-6 


Balance  of  capital  accounts  $120,000.00 

Less  dividend  to  be  paid  10,000.00 


Balance  remaining,  which  for  the  purpose 
of  distributing  the  dividend  should 
be  considered  a  complete  loss        $110,000.00 


Loss  to  each  partner  $  36,666.66 


Subtracting  this  loss  from  each  of  the  capital  accounts,  B  is  found  to  be  entitled 
to  $3,333.33  and  C  to  $13,333.33,  while  A  owes  the  firm  $6,666.66.  Awaiting 
subsequent  liquidation,  however,  the  debit  in  A's  account  would  remain  as  an 
account  receivable,  while  the  dividend  of  $10,000  would  be  distributed  pro  rata 
(i.e.,  1:4)  between  B  and  C,  resulting  inpayments  to  them  of  $2,000  and  $8,000, 
respectively. 

REFERENCES : 

Hatfield,  Chapter  XVII 
Lisle,  pages  194-232 


Copyright,  1919,  The  Ronald  Press  Company 


II-3-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  3 
STATEMENT  OF  REALIZATION  AND  LIQUIDATION 


Problem  7  (For  Class  Work) 

After  due  consideration  of  the  statement  of  affairs  (see  II-1-5)  A  &  B  de- 
cided to  liquidate.  The  cash  received  from  the  realization  of  customers' 
accounts  was  $82,000  and  from  inventories  $84,500.  The  property  assets  were 
bid  in  by  the  mortgage  holder  for  $130,000.  For  expenses  of  the  proceedings 
$500  was  paid  out,  and  the  balance  of  the  funds  used  to  pay  off  the  unsecured 
creditors  pro  rata. 

Prepare  a  realisation  £ind  liquidation  statement. 

Problem  8 

From  the  following  information  prepare  a  statement  of  affairs  with  a  rela- 
tive deficiency  account: 

Wages  Unpaid  $  3,000.00 

Real  Estate,  Buildings,  and  other  Plant  Equipment  95,000.00 

First  Mortgage  6%  Bonds 

(In  Treasury  $50,000) 

Bills  Payable  50,000.00 

(Secured  by  the  deposit  of  $50,000  First  Mortgage  6%  Bonds) 

Trade  Creditors  275,000.00 

Notes  Receivable: 

Good  $22,000.00 

Bad  3,000.00 

Doubtful  (take  up  50%)  8,000.00     33,000.00 


Bank  Overdraft  4,800.00 

Cash  on  hand  400.00 

Inventory  of  Merchandise  105,000.00 

Partially  Secured  Trade  Creditors 

(Secured  by  merchandise  of  a  value  of  $30,000)  45,000.00 

Ordinary  Trade  Accounts: 

Bad  $32,000.00 

Doubtful  (50%  probably  good)  35,000.00 

Good  85,000.00    152,000.00 


Capital  Stock  200,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-3-2 

Deficiency  Account: 

Balance  as  at  January  1,  1917  $33,000.00 

Net  Loss,  year  ending  December  31: 

1917  $80,050.00 

1918  39,350.00    119,400.00 


$152,400.00 
Dividends  declared  and  paid  40,000.00   $192,400.00 


Problem  9 

After  due  consideration  of  the  statement  of  affairs  prepared  April  30, 
the  firm  of  Miller  Brothers  decided  to  liquidate,  and  Fred  Miller  was  appointed 
receiver  for  that  purpose.  On  July  2,  1918,  he  reported  as  follows: 

COLLECTED 

Customers'  Accounts  $23,000.42 

Merchandise  Inventory  '                    26,500.50 

Miscellaneous  Supplies  100.00 

Delivery  Equipment  1,340.00 

Fixtures  785.00 

Advances  1,000.00 

DISBURSED 

Taxes  Accrued  $   200.00 

Notes  Payable  10,000.00 

Accounts  Payable  36,080.00 

Accommodation  Paper  5,000.00 

Bank  Loan  3,000.00 

Interest  Accrued  on  Notes  Payable  36.00 

Expenses  (including  Wages)  1,544.70 

$1,000  accommodation  paper  was  renewed.   The  accommodation  paper  which 
August  Miller  had  indorsed  was  charged  to  his  capital  account. 
You  are  asked  to  prepare: 

(a)  Journal  entries  required  by  the  bookkeeper  to  close  the  books; 

(b)  Realization  and  Liquidation  account  ; 

(c)  Status  of  partners'  accounts.   The  partnership  agreement  provided 
V      that  profits  and  losses  were  to  be  divided  as  follows: 

Fred  Miller  2/3;  August  Miller  1/3. 

MISCELLANEOUS  QUESTIONS 

Question  11 — Name  and  describe  briefly  the  principal  books  of  account  of 
a  business  with  which  you  are  familiar. 

Question  12 — Vi/hat  is  your  understanding  of  the  following  terms: 

(a)  Book  profits 

(b)  Inventory  reserves 

(c)  Contingent  liabilities 

Copyright,  1919,  The  Ronald  Press  Company 


II-3-3 

Question  13 — In  the  examination  of  the  customers'  accounts  you  find 
certain  credit  balances  aggregating  $13,011,31  arising  out  of  allowances  in 
respect  of  returned  goods,  defective  goods,  etc.  It  has  been  the  practice 
of  the  company  to  deduct  items  of  this  nature  from  sums  due  from  customers  and 
to  state  the  net  difference,  in  the  balance  sheet,  as  "uncollected  customers' 
accounts."  Have  you  any  criticism  to  make  of  this  treatment? 

Question  14 — Included  among  the  accounts  receivable  are  the  follow- 
ing items: 

(a)  Bad  debt  suspense  $13,103.93 

(b)  President's  drawing  account  10,500.00 

(c)  Consignment  stocks  51,708.25 

(d)  Working  funds  1,250.00 

Discuss  whether  or  not  these  items  have  been  properly  classified. 

Question  15 — Set  up  the  following  information  in  account  form  as  you 
would  expect  it  to  appear  on  the  books  of  the  consignee,  and  explain  concisely 
what  methods  should  be  followed  by  the  consignee  in  making  an  accurate  record 
of  such  consignments  if  handled  in  large  quantities:  July  1,  paid  freight  on 
shipment  of  1  car  (25,000  lbs.)  of  butter  from  the  Bitter  Hills  Creamery  Co., 
$123.50;  cartage  to  storage,  $45.75;  July  14,  sold  10,000  lbs.  @  47^/^?^;  July 
20,  sold  12,000  lbs.  @  48  1/30;  the  balance  was  purchased  by  the  consignee 
for  his  stock  (small  wholesale  sales)  at  the  average  market  price  July  20, 
480.   The  total  storage  costs  were  $78.90,  one-half  of  which  is  charged  by 
agreement  to  the  consignor.   In  addition  the  consignee  is  entitled  to  a 
commission  of  10%  on  gross  sales  and  a  1%  cash  discount  based  on  the  amount 
that  would  otherwise  be  remitted  if  the  balance  due  the  consignor  were  not 
paid  before  July  31.  Payment  is  made  on  July  25. 


Copyright,  1919,  The  Ronald  Press  Company 


II-3-4 

Solution  to  Problem  2 


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Copyright,  1919,  The  Ronald  Press  Company 


II-3-5 


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Copyright,  1919,  The  Ronald  Press  Company 


II-3-6 


Estimated  Loss  on 

Realization  of  Assets: 


Notes  Rec, 

$  100.00 

Customers' 

Accts. 

12,142.00 

Advances 

100.00 

Udse, 

Inventory- 

14,090.00 

Mi  so.  Suppl. 

Inventory 

200.00 

Unexpired 

Insurance 

50.00 

Rent  Prepaid 

200.00 

Delivery- 

Equip. 

550.00 

Fixtures 

825.00 

$28,257.00 

Accommodation  Paper 

Indorsed  by  A. 

Miller 

6,000.00 

Wages  Accrued 

173.00 

$34,430.00 

DEFICIENCY  ACCOUNT 

Capital  Accounts: 

Fred  Miller 

August  Miller 
Deficiency  to  Creditors 

per  Statement  of  Affairs 


$17,625.23 
16,417.61 

387.16 


$34,430.00 


Solution  to  Problem  3 

NOTE — Indicate  the  good  and  the  poor  points  of  the  following  solution, 

D  &  E 
STATEMENT  OF  PROFIT  AND  LOSS  ACCOUNT 


MANUFACTURING  ACCOUNT 


Inventory  of  Raw  Materials 

at  January  1,  1919 
Purchases  of  Raw  Materials 
(including  freight 
charges) 
Wages 

Factory  Expenses; 
Power,  Light, 

and  Heat 
Miscellaneous 
Factory 
Expenses 
Insurance 
Taxes 


$  19,032.27 


91,201.90 
8,111.03 


$1,100.50 


3,400.03 
900.00 
250.00 


5,650.53 


$123,995.73 


Inventory  of  Rav;  Materials 

at  June  30,  1919 
Discounts  Received 
•Balance — being  cost  of 
manufacture  carried  to 
the  Trading  Account 


16,103.78 
1,301.03 


106,590.92 


$123,995.73 


Copyright,  1919,  The  Ronald  Press  Company 


TRADING  ACCOUNT 


II-3-7 


Inventory  of  Finished 

Products  on  hand  at 

January  1,  1919 
Cost  of  Manufacture  for 

the  six  months  ended 

June  30,  1919,  brought 

down 
Balance — Gross  Profit 

on  Sales  carried  to  the 

Profit  and  Loss 

Account 


$  9,803.27 


106.590.92 


18,715.98 
$135,110.17 


Gross  Sales  Invoiced     $120,032.03 
LESS— 

Discounts 

Allowed     $2,100.75 
Freight 

Allowances   2,925.09   5,025.84 


Net  Sales  Invoiced 
Inventory  of  Finished 

Products  on  hand  at 

June  30,  1919 


115,006.19 

20,103.98 
$135,110.17 


PROFIT  AND  LOSS  ACCOUNT 


Partners'  Salaries 
Interest  on  Partners* 

Capital  Accounts 
Office  Rent 
Traveling  Expenses 
Advertising 
Office  Salaries 
Interest  Paid  on  Bank  Loans 
Bad  Debts  Written  Off 
Sundry  Office  Expenses 


Balance — Net  Profits 

carried  to  the  Partners* 
Drawing  Accounts  as 
follows: 

D    1,142.89 

E    1,142.89 


$  4,800.00 

1,497.52 
900.00 
1,425.50 
1,783.03 
4,004.50 
1,403.27 
854.83 
1,103.92 

17,772.57 


2,285.78 
$20,058.35 


Gross  Profits  on  Sales 
brought  down  from 
Trading  Account 
Rents  Collected 
Interest  Received  or 
Accrued  on  Bills 
Receivable 


$18,715.98 
900.00 


442.37 


$20,058.35 


Copyright,  1919,  The  Ronald  Press  Company 


II-3-8 


CAPITAL  ASSETS: 

Real  Estate  and  Buildings 
Machinery  and  Fixtures 
Office  Furniture 

Total  Capital  Assets 
CURRENT  ASSETS: 
Inventories 
Customers'  Accounts 
Bills  Receivable 

Total  Current  Assets 


BALANCE  SHEET 
ASSETS 


$  3,700.00 

10,011.93 

990.62 


$36,207.76 

24,093.27 

9,800.00 


$14,702.55 


70,101.03 

$84,803.58 


LIABILITIES 


CAPITAL  ACCOUNTS: 

Balance  at  January  1,  1919 

Profits 

Interest  on  Capital  Account 

Salaries 


LESS — Drawings 

BALANCE  at  June  30,  1919 

TOTAL  of  Capital  Accounts 
CURRENT  LIABILITIES: 
Bills  Payable 
Trade  Creditors 
Accrued  Interest  and  Taxes 

Total  Current  Liabilities 


D  E 

$32,113.29  $17,803.92 

1,142.89  1,142.89 

963.40  534.12 

2,700.00  2,100.00 


$36,919.58  $21,580.93 
2,500.00    2,100.00 


$34,419.58  $19,480.93 


$10,000.00 

19,803.04 

1,100.03 


$53,900.51 


30,903.07 

$84,803.58 


JOURNAL  ENTRIES 

(1) 
Partners'  Salaries  $  4,800.00 

To — D — Drawing  Account 
E —   "       " 
Salaries  allowed  to  the  respective  partners  under  the 
partnership  agreement. 


$2,700.00 
2,100.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-3-9 


(2) 
Interest  on  Partners'  Capital  Account  $  1,497,52 

To — D — Drawing  Account  $  963.40 

E—   "       "  534.12 

Interest  at  6%  per  annum  for  six  months  on 
each  partners'  capital  investment  at 
January  1,  1919. 

(3) 

Raw  Materials  on  hand  June  30,  1919  16,103,78 

To — Manufacturing  Account  16,103.78 

To  take  up  the  inventory  of  raw  materials 
on  hand  June  30,  1919. 

(4) 
Merchandise  (or  Raw  Materials  Purchased)  Account    3,111.32 

To — Freight  on  Purchases  3,111,32 

To  close  latter  account. 

(5) 

Finished  Products  on  hand  June  30,  1919  20,103.98 

To— Trading  Account  20,103.98 

To  take  up  the  inventory  of  finished  products 
on  hand  at  June  30,  1919. 

CLOSING  ENTRIES 

11) 
Manufacturing  Account  $123,995.73 

To — Inventory  of  Raw  Materials  at  January 

1,  1919  $19,032.27 

Merchandise  Account  91,201.90 

Wages  8,111.03 

Power,  Light,  and  Heat  1,100.50 

Miscellaneous  Factory  Expenses  3,400.03 

Insurance  '  900.00 

Taxes  250.00 

To  close  foregoing  accounts. 

(2) 

Discounts  Received  1,301.03 

To — Manufacturing  Account  1,301.03 

To  close  foregoing  account. 

(3> 
Trading  Account  .  106,590.92 

To — Manufacturing  Account  106,590.92 

To  transfer  the  cost  of  goods  manufactured 
during  the  six  months  ended  June  30,  1919 
to  the  Trading  Account. 

Copyright,  1919,  The  Ronald  Press  Company 


II-3-10 


Sales  Account 

To — Trading  Account 
To  close  foregoing  account. 


(4) 


(5) 


1120,032.03 


$120,032.03 


Trading  Account  14,629.11 

To — Discounts  Allowed 
Freight  Allowances 

Inventory  of  Finished  Products  on  hand 
at  January  1,  1919 
To  close  foregoing  accounts, 

(6) 
Trading  Account  18,715.98 

To — Profit  and  Loss  Account 
To  transfer  the  gross  profit  on  sales  to  the 
Profit  and  Loss  Account. 


2,100.75 
2,925.09 

9,603.27 


18,715.98 


(7) 

Rents  Collected 

Interest  Received  or  Accrued  on  Bills  Receivable 
To — Profit  and  Loss  Account 
To  close  foregoing  accounts. 

(8) 
Profit  and  Loss  Account 

To — Partners'  Salaries 

Interest  on  Partners*  Capital  Accounts 
Office  Rent 
Traveling  Expenses 
Advertising 
Office  Salaries 
Interest  Paid  on  Bank  Loans 
Bad  Debts  Written  Off 
Sundry  Office  Expenses 
To  close  foregoing  accounts. 

(9) 
Profit  and  Loss  Account 

To — D — Drawing  Account 
E —   "       •• 
To  transfer  net  profit  to  drawing  accounts. 


900.00 
442.37 


17,772.57 


2,285.78 


(10) 


D — Drawing  Account 
E —   "        " 

To — D — Capital  Account 
E —   "       " 
To  'close  drawing  accounts. 


2,306.29 
1,677.01 


1,342.37 


4,800.00 
1,497.52 

900.00 
1,425.50 
1,783.03 
4,004.50 
I5403.27 

854.83 
1,103.92 


1,142.89 
1,142.89 


2,306.29 
1,677.01 


Copyright,  1919,  The  Ronald  Press  Company 


II-3-11 


ANSWERS  TO  QUESTIONS 


Answer  to  Question  1 — There  would  be  in  this  case  a  surplus  belonging  to 
stockholders  which,  if  liquidation  actually  takes  place,  will  be  distributed 
among  them.   The  form  shown  in  Lecture  1  would  be  altered  as  follows: 


Surplus  belonging  to 
Stockholders 

Balance — representing 
loss  in  book  value  of 
stockholders*  in- 
vestment 


Capital  Stock 
Surplus 


$ 


Answer  to  Question  2 — 


M  S  COMPANY 
DEFICIENCY  ACCOUNT 


Losses  arising  from  fire: 
Buildings  $■ 

Fixtures 
Merchandise 


Loss  over  book  value 
on  realization  of 
Assets: 
Land 

Buildings 

Customers'  Accounts 
Merchandise 
Fixtures 


Profits  from  Operation 
for  four  months  ending 
June  30,  1919 

Capital  stock 

Surplus 


Dividends  declared  and 
paid  in  1919 


Answer  to  Question  3 — 

(a)  For  a  business  of  the  type  described  the  records  are  adequate.  Many 
small  retail  businesses  having  a  capital  of  a  few  thousand  dollars  may  secure 
from  such  records  all  the  information  necessary  for  credit  and  income  tax  pur- 
poses, as  well  as  for  their  own  purposes, 

(b)  A  balance  sheet  together  with  a  supporting  profit  emd  loss  statement 
may  be  easily  prepared.   The  assets  would  probably  consist  of  only  merchandise 
and  cash,  and  there  would  be  no  liabilities.  The  surplus  at  the  end  of  the 

Copyright,  1919,  The  Ronald  Press  Company 


II-3-12 

period  would  be  the  surplus  at  the  beginning,  plus  net  profits,  less  dividends 
paid. 

(c)  The  system  followed  would  be  a  double-entry  system,  provided  the  state- 
ments described  in  (b)  balance  and  are  prepared  regularly.  The  columnar  cash 
book  in  this  case  becomes  a  ledger. 

Answer  to  Question  4 — In  arranging  the  accounts  to  be  kept  in  a  general 
ledger  of  a  single  proprietor,  partnership,  or  corporation  the  following  order 
is  usually  adopted: 

1.  Capital  liability  accounts,  including:  single  proprietor's, 

partners'  capital  and  drawing  accounts;  capital  stock,  surplus, 
and  other  capital  liability  accounts. 

2.  Capital  asset  accounts,  with  proper  sub-classification  for  each  of 

the  various  units  of  a  company's  property  and  holdings, 

3.  Current  asset  accounts — in  the  same  order  in  which  the  various  items 

would  appear  in  the  balance  sheet. 

4.  Current  liability  accounts — in  the  same  order  in  which  the  various 

kinds  of  current  liabilities  would  be  stated  in  the  balance  sheet. 

5.  Profit  and  loss  or  nominal  accounts,  with  the  accounts  arranged  in 

the  same  order  in  which  the  items  would  appear  in  the  regular 
periodical  statements  prepared. 

A  preferable  method  in  many  cases  is  to  show,  first,  the  assets  in  the  order 
they  appear  on  the  balance  sheet ;  second,  the  liabilities  in  the  order  they 
appear  on  the  balance  sheet  ;  third,  the  profit  and  loss  accounts  in  the  order 
they  appear  on  the  periodical  statement  of  profits  and  income. 

Answer  to  Question  5— 

(a)  A  STATEMENT  OF  CASH  RECEIPTS  AND  DISBURSEMENTS  is  a  summary  of  the  cash 
transactions  for  a  period  regardless  of  whether  they  are  in  respect  of  income 
and  expenditure  pertaining  to  that  period,  or  not.   On  the  left-hand  side  is 
shown: 

1,  The  cash  on  hand  or  in  bank  at  the  beginning  of  the  period 

2,  The  receipts  for  the  period  under  appropriate  descriptive  headings 

and  on  the  right-hand  side  is  shown: 

1,  The  disbursements  for  the  period  under  appropriate  descriptive  head- 

ings, 

2,  The  balance  on  hand  or  in  bank  at  the  end  of  the  period 

Both  revenue  and  capital  receipts  and  disbursements  are  included. 

(b)  A  STATEMENT  OF  INCOME  AND  EXPENDITURE  is  a  term  applied  to  the  operating 
statement  of  a  non-trading  concern  and  shows  the  income  and  expenses  for  the 
period,  whether  received,  paid,  or  outstanding,  and  thus  corresponds  to  a  profit 
and  loss  account.  It  does  not  include  capital  receipts  or  capital  expenditures. 

These  two  statements  differ  in  that  the  former  is  prepared  on  a  cash  basis 
while  the  latter  is  prepared  on  a  profit  and  loss  basis. 

Copyright,  1919,  The  Ronald  Press  Company 


II-3-13 

REALIZATION  AND  LIQUIDATION  ACCOUNT 

DEFINITION — Statement  showing  in  summarized  form  the  results  of  the  liquida- 
tion of  a  business, 

FORM— 

(Name  of  Concern) 
REALIZATION  AND  LIQUIDATION  ACCOUNT 
(Date) 

ASSETS  TO  BE  REALIZED:                   LIABILITIES  TO  BE  LIQUIDATED: 
Land  § Notes  Payable        $ 


Buildings Audited  Vouchers       

Equipment  — — -  

Inventories  — —         ADDITIONAL  LIABILITIES  TO  BE 

Customers'  Accounts      LIQUIDATED 

Notes  Receivable         $- PROCEEDS  FROM  REALIZATION  OF 

^   ASSETS 

ADDITIONAL  ASSETS  DISCLOSED      ASSETS  NOT  REALIZED 

LIABILITIES  LIQUIDATED  BALANCE— Net  Loss  on  Realiza- 

LIABILITIES  NOT  LIQUIDATED       tion  and  Liquidation 

EXPENSES  OF  REALIZATION  AND 

LIQUIDATION  

BALANCE— Net  Profit  on  Realisa- 
tion and  Liquidation  


Dividend  to  Creditors %. 

EXPLANATION  OF  TERMS  USED— 

1.  ASSETS  TO  BE  REALIZED  are  the  assets  shown  by  the  books  or  the  latest 
balance  sheet.  They  are  listed  at  book  values.  Cash  is  not  included  because 
it  is  already  realized, 

2.  ADDITIONAL  ASSETS  DISCLOSED.  Refers  to  assets  not  appearing  on  the 
books  which  can  be  realised  upon  for  the  purpose  of  meeting  liabilities  to  be 
liquidated. 

3.  LIABILITIES  TO  BE  LIQUIDATED.  Refers  to  the  liabilities  appearing  on  the 
books  or  latest  balance  sheet  which  are  tc  be  paid  from  the  proceeds  of  the  asseti 
realized  upon. 

4.  ADDITIONAL  LIABILITIES  TO  BE  LIQUIDATED.  Refers  to  liabilities  which  must 
be  paid  but  which  do  not  appear  on  the  books. 

5.  LIABILITIES  LIQUIDATED.  Refers  to  the  liabilities  listed  under  (3)  or  (4) 
which  have  been  paid  by  the  receiver  or  liquidator. 

6.  LIABILITIES  NOT  LIQUIDATED.  Refers  to  the  liabilities  listed  under  (3) 
or  (4)  which  have  not  been  paid  at  the  date  the  statement  is  prepared. 

7.  PROCEEDS  FROM  REALIZATION  OF  ASSETS.  Refers  to  the  amount  realized  from 
the  sale  of  assets  listed  under  (1)  or  (2)« 


Copyright,  1919,  The  Ronald  Press  Company 


II-3-14 

8.  ASSETS  NOT  REALIZED.  Refers  to  the  assets  listed  under  (1)  or  (2)  which 
have  not  been  disposed  of  at  the  date  the  statement  is  prepared. 

9.  EXPENSES  OF  REALIZATION  AND  LIQUIDATION.  Refers  to  the  expenses  incurred 
by  the  receiver  or  liquidator  in  disposing  of  the  assets  and  discharging  the 
liabilities. 

10.  BALANCE.  The  difference  between  the  items  on  the  debit  and  credit  sides 
represents  the  profit  (in  case  the  credits  exceed  the  debits)  or  loss  (in  case 
the  debits  exceed  the  credits)  on  realization  and  liquidation. 

11.  "CASH"  does  not  appear  as  an  "Asset  to  be  Realized"  or  as  an  "Asset  Not 
Realized." 

LEDGER  ACCOUNTS — Two  methods  are  in  general  use: 

1.  A  Realization  and  Liquidation  account  is  opened  in  the  general  ledger. 
By  journal  entries  the  assets  to  be  realized  are  charged  to  this  account  and  the 
liabilities  to  be  liquidated  are  credited  thereto.  Additional  assets  disclosed 
would  be  charged  to  the  Realization  and  Liquidation  account  by  journal  entry, 
the  contra  credit  being  the  Profit  and  Loss  account  or  an  investment  account. 
Similarly,  additional  liabilities  to  be  liquidated  would  be  credited  to  the 
Realization  and  Liquidation  account  and,  per  contra,  charged  to  the  Profit  and 
Loss  account  or  an  investment  account.  The  debits  for  liabilities  liquidated 
are  posted  from  the  liquidators'  cash  disbursements  book  and  the  credits  for 
assets  realized  are  posted  from  the  cash  receipts  book.  Expenses  of  realization 
and  liquidation  will  be  posted  from  the  cash  disbursements  book. 

2.  Instead  of  transferring  the  assets  and  liabilities  to  a  general  Realiza- 
tion and  Liquidation  account,  the  proceeds  from  the  sale  of  each  asset  may  be 
credited  directly  to  the  respective  asset  accounts,  and  the  payment  of  each 
liability  may  be  charged  directly  to  the  respective  liability  accounts.  Any 
profits  or  losses  on  realization  are  then  transferred  to  the  Profit  and  Loss 
account. 

ENTRIES— 

1.  Transfer  all  assets  to  be  realized  to  the  Realization  and  Liquidation 
account. 

2.  Transfer  all  liabilities  to  be  liquidated  to  the  Realization  and  Liquida- 
tion account. 

3.  Take  up  any  additional  assets  disclosed. 

4.  Take  up  any  additional  liability  to  be  liquidated. 

5.  Credit  Realization  and  Liquidation  account  with  proceeds  from  sale  of 
assets  as  per  cash  receipts  book. 

6.  Debit  Realization  and  Liquidation  account  with  liabilities  discharged  as 
per  cash  disbursements  book. 

7.  Where  a  debit  is  liquidated  by  transfer  of  an  asset  make  a  journal  entry 
within  the  account  for  record  purposes,  as  follows: 


Realization  and  Liquidation  Account 

To — Realization  and  Liqu::dation  Account 
To  record  transfer  of  in  payment  of 


8.  Debit  Realization  and  Liquidation  account  with  expenses  of  realization  as 
per  cash  disbursements  book. 

Copyright,  1919,  The  Ronald  Press  Company 


II-3-15 

WHEN  THE  REALIZATION  AND  LIQUIDATION  ACCOUNT  IS  TO  BE  STATED  it  is  customary 
for  record  purposes  to  make  memorandum  journal  entries  charging  and  crediting 
Realisation  and  Liquidation  account  in  order  to  show  "Liabilities  not  Liquidated* 
and  "Assets  not  Realised"  on  the  face  of  the  Realisation  and  Liquidation  account, 
as  follows: 

(1) 

Realisation  and  Liquidation  Account  $ - 

To — Realisation  and  Liquidation  Account  |— — — . 

To  record  assets  not  realised  at 

(2) 

Realisation  and  Liquidation  Account 

To — Realisation  and  Liquidation  Accounts  

To  record  liabilities  not  liquidated  at 


In  entry  (1)  the  credit  only  would  be  posted  and  in  entry  (2)  the  debit  only  would 
be  posted.  The  effect  of  these  postings  i£.  to  cancel  the  original  charge  for  asset 
to  be  realised  and  the  original  credit  for  liability  to  be  liquidated.   Then 
the  profit  and  loss  on  realisation  and  liquidation  is  ascertained  and  trans- 
ferred by  journal  entry,  as  follows: 

(3) 

Profit  and  Loss  Account  $— — — 

To — Realisation  and  Liquidation  Account  $—- .— — 

To  transfer  loss  to  date. 

Having  balanced  the  Realisation  and  Liquidation  account,  post  the  debit  of 
entry  (1)  and  the  credit  of  entry  (2)  and  proceed  as  before. 

The  alternative  method  would  be  to  transfer  to  the  respective  asset  and 
liability  accounts  all  assets  not  realised  and  liabilities  not  liquidated. 
After  eliminating  the  profit  or  loss  as  shown  in  entry  (3)  retransfer  the  assets 
and  liabilities  to  the  Realisation  and  Liquidation  account, 

BOOKS  OF  RECEIVER — If  concern  is  to  be  continued  under  a  receiver  instead 
of  liquidating  immediately,  it  is  advisable  to 

1.  Transfer  the  assets  and  liabilities  to  the  receiver  at  the  expected-to- 
realise  and  expect ed-to-rank  values.  The  difference  between  these  values  and 
the  book  values  would  be  closed  into  the  Profit  and  Loss  account. 

2.  The  receiver  would  open  a  new  set  of  accounts  starting  out  with  the  assets 
and  liabilities  taken  over.  The  excess  of  assets  and  liabilities  would  be 
credited  to  the  bankrupt  estate. 

3.  The  assets  and  liabilities  created  through  the  receiver's  operations 
should  be  separated  rigorously  from  the  assets  and  liabilities  taken  over  from 
the  estate, 

REFERENCES : 

Kester,  Vol.  2,  pages  639-650 
Esquerre,  Chapter  XL 


Copyright,  1919,  The  Ronald  Press  Company 


II-3-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  3 
STATEMENT  OF  REALIZATION  AND  LIQUIDATION 


Problem  7  (For  Class  Work) 

After  due  consideration  of  the  statement  of  affairs  (see  II-1-5)  A  &  B  de- 
cided to  liquidate.  The  cash  received  from  the  realization  of  customers' 
accounts  was  582,000  and  from  inventories  $84,500,  The  property  assets  were 
bid  in  by  the  mortgage  holder  for  $130,000.  For  expenses  of  the  proceedings 
$500  was  paid  out,  and  the  balance  of  the  funds  used  to  pay  off  the  unsecured 
creditors  pro  rata. 

Prepare  a  realization  and  liquidation  statement. 

Problem  8 

From  the  following  information  prepare  a  statement  of  affairs  with  a  rela- 
tive deficiency  account: 

Wages  Unpaid  $  3,000.00 

Real  Estate,  Buildings,  and  other  Plant  Equipment  95,000.00 

First  Mortgage  6%  Bonds 

(In  Treasury  $50,000) 

Bills  Payable  50,000.00 

(Secured  by  the  deposit  of  $50,000  First  Mortgage  6%  Bonds) 

Trade  Creditors  275,000.00 

Notes  Receivable: 

Good  $22,000.00 

Bad  3,000.00 

Doubtful  (take  up  50%)  8,000.00     33,000.00 


Bank  Overdraft  4,800.00 

Cash  on  hand  400.00 

Inventory  of  Merchandise  105,000.00 

Partially  Secured  Trade  Creditors 

(Secured  by  merchandise  of  a  value  of  $30,000)  45,000.00 

Ordinary  Trade  Accounts: 

Bad  $32,000.00 

Doubtful  (50%  probably  good)  35,000.00 

Good  85,000.00    152,000.00 


Capital  Stock  200,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-3-2 

Deficiency  Account: 

Balance  as  at  January  1,  1917  $33,000.00 

Net  Loss,  year  ending  December  31: 

1917  $80,050.00 

1918  39,350.00    119,400.00 


$152,400.00 
Dividends  declared  and  paid  40,000.00   $192,400.00 


Froblem  9 

After  due  consideration  of  the  statement  of  affairs  prepared  April  30, 
the  firm  of  Miller  Brothers  decided  to  liquidate,  and  Fred  Miller  was  appointed 
receiver  for  that  purpose.   On  July  2,  1918,  he  reported  as  follows: 

COLLECTED 

Customers'  Accounts  $23,000.42 

Merchandise  Inventory  26,500.50 

Miscellaneous  Supplies  100.00 

Delivery  Equipment  1,340.00 

Fixtures  785.00 

Advances  1,000.00 

DISBURSED 

Taxes  Accrued  $   200.00 

Notes  Payable  10,000.00 

Accounts  Payable  36,080.00 

Accommodation  Paper  5,000.00 

Bank  Loan  3,000.00 

Interest  Accrued  on  Notes  Payable  36.00 

Expenses  (including  Wages)  1,544.70 

$1,000  accommodation  paper  was  renewed.   The  accommodation  paper  which 
August  Miller  had  indorsed  was  charged  to  his  capital  acccimt. 
You  are  asked  to  prepare: 

(a)  Journal  entries  required  by  the  bookkeeper  to  close  the  books  ; 

(b)  Realisation  and  Liquidation  account ; 

(c)  Status  of  partners'  accounts.   The  partnership  agreement  provided 

that  profits  and  losses  were  to  be  divided  as  follows: 
Fred  Miller  2/3;  August  Miller  1/3. 

MISCELLANEOUS  QUESTIONS 

Question  11 — Name  and  describe  briefly  the  principal  books  of  account  of 
a  business  with  which  you  are  familiar. 

Question  12 — What  is  your  understanding  of  the  following  terms: 

(a)  Book  profits 

(b)  Inventory  reserves 

(c)  Contingent  liabilities 

Copyright,  1919,  The  Ronald  Press  Company 


H-4-L 


CO^tPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  4 
CAPITAL  AND  REVENUE  EXPENDITURES 


Problem  10 

The  balance  sheet  of  the  Miller  Motor  Car  Co,  on  June  30,  1918,  was 
as  follows: 

MILLER  MOTOR  CAR  CO. 
BALANCE  SHEET,  JUNE  30,  1918 

ASSETS 


RESERVE  FOR 

PRESENT 

CAPITAL  ASSETS: 

COST 

DEPRECIATION 

VALUE 

Land 
Buildings 

$  40,000.00 
70,000.00 

% 

^   40,000.00 
69,800.00 

ff 

200.00 

Machinery,  Tools,  and 

Equipment 

165,603.50 

2,213.36 

163,390.14 

Office  and  Warehouse 

Fixtures 

2,045.00 

17.48 

2,027.52 

Delivery  Equipment 

1,750.00 

43.76 

1,706.24 

Good-will 


$279,398.50   $  2,474.60  $276,923.90 

66,000.00  $342,923.90 


INVESTMENT  IN  DURANT  TRUCK  CO. 
CURRENT  ASSETS: 
Inventories: 

Automobiles 

Finished  Parts 

Work  in  Progress 

Raw  Materials 

Coal 

Stationery  and  Printing 

Accounts  and  Notes  Receivable: 
Customers*  Accounts 
Notes  Receivable 
Accrued  Interest  on  Notes  Receivable 


200,000.00 


%   30,550.00 

18,463.72 

26,132.11 

3,740.80 

3,500.00 

100.00  $  82,486.63 


$104,013.40 

116,003.00 

315.92 

$220,332.32 


Copyright,  1919,  The  Ronald  Press  Company 


II-4-2 


Deduct — Reserves  for; 
Bad  Debts 
Discounts 

CASH: 

Cash  in  Bank 
Petty  Cash  Fund 

DEFERRED  CHARGES: 

Advances  to  Salesmen 
Unexpired  Insurance 
Rent  Paid  in  Advance 
Discount  on  Stock 

TOTAL  ASSETS 


$1,522.75 
1,800.00 


3,322.75   217,009.57 


50,186.45 

500.00    50,686.45   350,182.65 


$  2,000.00 
766.66 
100.00 
2,000.00     4,866.66 


$897,973.21 


Deduct — Dividends  Declared  and  Paid 
Preferred  Stock  1.75% 
Common  Stock    1.00% 


$500,000.00 


LIABILITIES 
CAPITAL  STOCK: 

7%  Preferred — Authorized  and  Issued 
(1,000  shares,  par  value  $100 
each) 
~  Common — Authorized  (5,000  shares, 
par  value  $100  each) 


Issued  and  Outstanding 

BONDED  INDEBTEDNESS: 

5%  First  Mortgage  Bonds 
Q%   First  Mortgage  Bonds 

CURRENT  LIABILITIES: 
Audited  Vouchers 
Accrued  Liabilities: 
Pay-roll 
Bond  Interest 
Taxes 

SURPLUS: 

Balance,  June  1 

Add — Profits  for  June 


$  41,649.55 
4,625.00 
2,295.34 


1,750.00 
1,000.00 


$100,000.00 


433,900.00  $533,900.00 


$150,000.00 

75,000.00   225,000.00 


60,144.12 


48,569.89   108,714.01 


$  7,265.02 
25,844.18 

$  33,109.20 


2,750.00    30,359.20 


$897,973.21 


Copyrighti  1919,  Tile  Ronald  Press  Company 


I 1-4-3 

On  July  1,  1918,  the  plant  was  destroyed  by  fire.  At  a  special  meeting 
of  the  Board  of  Directors  held  the  following  day,  a  committee  was  appointed  to 
examine  into  the  affairs  of  the  company  and  report  their  finding  to  the  Board. 

July  6,  1918,  the  special  committee  reported  as  follows: 

1.  Buildings,  machinery  and  equipment,  delivery  equipment, 

fixtures,  and  inventories,  were  totally  destroyed. 
Insurance  carried  was  |100,000. 

2.  Estimated  salvage,  of  which  $10,000  pertains  to  inventories, 

$40,000. 

3.  No  insurance  is  carried  on  inventories. 

4.  Value  of  land  appreciated,  $5,000. 

5.  Notes  receivable — $25,000  considered  good;  $50,000  considered 

doubtful,  of  which  it  is  estimated  30%  will  be  recovered; 
the  balance,  $41,003,  desperate. 

6.  Customers*  accounts — $30,000  considered  good  ;  $30,000  doubtful, 

of  which  it  is  estimated  50%  will  be  recovered;  $44,013.40, 
desperate. 

7.  Accrued  interest  on  notes  receivable—all  but  $103.42  considered 

good. 

8.  Good-will — In  event  of  liquidation  it  is  worthless. 

9.  Bond  interest — $200  has  accrued  to  date. 

10.  Investment  will  realize  $100,000. 

11,  Expenses  of  realization  and  liquidation  estimated  at  $12,500. 

You  are  retained  by  the  committee  to  prepare  a  statement  of  affairs  and  a 
deficiency  account. 

Problem  11 

A  corporation  was  formed  under  the  laws  of  the  State  of  Illinois  with  an 
authorized  capital  stock  of  $2,000,000,  divided  into  20,000  shares  of  par  value 
of  $100  each,  all  of  which  was  subscribed  for  and  subsequently  paid  in  in  cash, 
aside  from  $300,000  (par  value)  which  was  satisfied  by  the  subscriber  turning 
in  real  estate  and  other  property  upwards  of  that  value. 

Formulate  the  necessary  opening  entries  to  be  given  effect  to  on  the  books 
of  the  company  in  respect  to  the  above-mentioned  transactions. 

Problem  12 

Five  years  after  the  organization  of  the  corporation  described  in  Problem  11, 
a  stock  dividend  of  50%  was  declared,  and  at  the  same  time  $1,000,000  preferred 
stock  was  authorized  and  offered  for  sale  at  par  to  holders  of  common  stock 
and  at  121  to  outsiders.   The  holders  of  common  stock  were  allowed  to  subscribe 
up  to  40%  of  their  holdings  in  common,  not  including  the  stock  dividend.  They 
took  advantage  of  this  privilege  in  full,  and  the  balance  was  disposed  of  to 
the  public  at  the  offered  price. 

Provide  journal  entries  for  the  above  transactions.. 


Copyright,  1919,  The  Ronald  Press  Company 


II-4-4 

MISCELLANEOUS  QUESTIONS 

Question  16 — What  do  you  understand  by  the  term  "deferred  charges  to  oper- 
ating or  income"?  Name  a  few  items  that  ordinarily  are  regarded  as  being  deferred 
charges. 

Question  17 — What  is  your  understanding  of  the  term  "Notes  Receivable 
Discounted"?  How  should  an  item  of  this  kind  be  dealt  with  in  stating  the 
balance  sheet  at  the  end  of  a  period? 

Question  18 — What  do  you  understand  by  the  following  terms: 

(a)  Provision  or  Reserve  for  Bad  and  Doubtful  Accounts 

(b)  Accrued  Taxes 

(c)  Accrued  Wages 

Draw  up  a  skeleton  ledger  account  showing  the  nature  of  the  transactions 
that  would  ordinarily  enter  into  the  accounts  referred  to.  How  would  the  re- 
spective items  be  shown  in  a  balance  sheet? 

Question  19 — How  would  you  distinguish  between  plant  and  machinery  expen- 
ditures chargeable  to  capital  asset  accounts  and  those  chargeable  to  ordinary 
repair  and  maintenance  accounts? 

Question  20— Do  you  consider  that  the  following  expenditures  are  proper 
additions  to  the  property  accounts? 

(a)  Repairs  to  buildings,  machinery,  and  other  equipment  at  a  total 

cost  of  $8,110.17. 

(b)  Purchase  of  horses,  wagons,  and  stable  equipment  at  a  cost  of 

$11,000 — no  depreciation  has  been  provided  in  respect  of  a  similar 
asset  now  standing  upon  the  books  of  the  company. 


Solution  to  Problem  4 

NOTE — See  pages  6  and  7  for  the  solution  to  this  problem. 


Copyright,  1919,  The  Ronald  Press  Company 


II-4-5 


Solution  to  Problem  5 


A  &  B 
BALANCE  SHEET,  DECEMBER  31,  1918 


ASSETS 
CAPITAL  ASSETS: 

Real  Estate  $  5,000.00 
Building  10,000.00 
Furniture  and 

Fixtures      2,000.00  $17,000.00 


CURRENT  ASSETS: 

Cash         $  1,000.00 

Notes  Receiv- 
able        8,000.00 

Customers'  Ac- 
counts      12,000.00 

Merchandise 

Inventory    10,000.00   31,000.00 


$48,000.00 


LIABILITIES 
CAPITAL  ACCOUNTS:  . 
A — December  31, 

1918        I  9,000.00 
B — December  31, 

1918         28,000.00  $37,000.00 


CURRENT  LIABILITIES: 

Notes  Payable  $4,000.00 
Creditors*  Ac- 
counts      7,000.00   11,000.00 


$48,000.00 


A  &  B 

STATEMENT  OF  PARTNERS'  CAPITAL  ACCOUNTS 

DECEMBER  31,  1918 


Balance,  January  1,  1918 
Add  Interest 


Deduct  Interest 

Add  Profits 

Balance,  December  31,  1918 


A  B       TOGETHER 
$9,000.00  $27,000.00  $36,000.00 
100.00      100.00 


•,000.00  $27,100.00  $36,100.00 
300.00    .300.00 


1,700.00  $27,100.00  $35,800.00 
300.00      900.00    1,200.00 


$9,000.00  $28,000.00  $37,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


I 1-4-6 


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II-4-7 


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Copyright,  1919,  The  Ronald  Press  Company 


I 1-4-8 

Solution  to  Problem  6 

Cash 


(1) 


To — C — Capital  Account 
For  a  one-quarter  interest  in  the  partnership. 

(2) 
Good-Will 

To — A — Capital  Account 
B — Capital  Account 
Division  of  good-will  between  partners  on 
basis  of  original  capital  contributed. 

(3) 
A — Capital  Account 
To — Cash 
To  reduce  A's  investment  to  one-quarter  of 
the  partnership  capital. 

(4) 
B — Capital  Account 
To — Cash 

Notes  Payable 
To  reduce  B's  investment  to  one-half  of  the 
partnership  capital. 


$  9,000,00 


3,000.00 


$  9,000.00 


750.00 
2,250.00 


750.00 


750.00 


12,250.00 


8,250.00 
4,000.00 


ANSWERS  TO  QUESTIONS 


Answer  to  Question  6 — 


CUSTOMERS 

'  LEDGER 

1918 

1918 

January  1 

Balance 

$  5,000.00 

January  31 

"    31 

Sales 

15,000.00 

"    31 

"    31 

Journal 

4,000.00 

31 
31 

31 


February  1  Balance 


$24,000.00 


$14,382.38 


Cash  $  8,000.00 

Discounts  allowed    247.62 
Notes,  etc.       1,250.00 
Freight,  etc.,  al- 
lowances        120.00 
Balance         14,382.38 


$24,000.00 


Answer  to  Question  7 — The  Petty  Cash  account  will  be  charged  originally  with 
$200.  As  disbursements  are  made  by  the  petty  cashier,  vouchers,  or  debit 
tickets,  will  be  taken  in  receipt  therefor.  The  petty  cashier  makes  up  a  petty 
cash  sheet  from  the  debit  slips  on  hand  and  a  voucher  is  prepared  as  for  any 
other  payment;  an  officer  of  the  corporation  0  K*s  the  voucher,  which  is  then 
passed  on.  for  payment  by  the  general  or  disbursing  cashier.  An  entry  will  be 
made  in  the  cash  disbursements  book  at  the  time  of  the  replenishment  of  the 
fund  as  follows: 


Copyright,  1919,  The  Ronald  Press  Company 


II-4-9 


Postage  $14.00 

Dinners  12.00 

Advertising                .  75.00 

Car-fare  9.20 

Miscellaneous  General  Expense  7.00 

To— Cash  '     $117.20 

Answer  to  Question  8 — The  following  journal  entries  would  be  made: 

(1) 


Good- Will  $ — 

To — M — Capital  Account  $ 

N—   "       "  

To  set  up  Good-Will  on  books  prior  to  sale  thereof 
to  Smith  Manufacturing  Co. 

(2) 

Smith  Manufacturing  Co.,  Vendee  •-- — -— 

To — Land 

Buildings 

Machinery ~ 

Good-Will  

Merchandise ~ 

Etc.  — — ■ 

To  record  transfer  of  assets  to  Smith  Manufac- 
turing Co*  as  per  bill  of  sale  dated 

(3) 

Accounts  Payable  — .— 

Notes  Payable  • — —— • 

To — Smith  Manufacturing  Co.,  Vendee  ♦-— — — 

To  record  assumption  of  liabilities  by 
Smith  Mfg.  Co. 

(4) 
Capital  Stock  of  Smith  Manufacturing  Co.  •—- —•- 

To — Smith  Manufacturing  Co.,  Vendee  ■•— — 

Payment  for  net  assets  acquired  as  per 
bill  of  rale. 

(5) 

M — Capital  Account  i,— «-— — 

N— Capital  Account  — 

To — Capital  Stock  of  Smith  Manufacturing  Co.  — — — . 

Distribution  of  remaining  assets  to  partners. 

NOTES— 

1.  Without  instructions  to  the  contrary  good-will  will  be  credited  to  the 
partners'  capital  accounts  according  to  the  profit  and  loss  sharing  ratio. 

2.  Not  all  the  assets  and  liabilities  of  the  partnership  may  be  transferred, 
in  which  case  the  partnership  books  should  be  continued  until  complete 
liquidation  is  effected. 

Copyright,  1919,  The  Ronald  Press  Company 


II-4-10 

Answer  to  Question  9 — 

(a)  Notes  Payable  would  be  credited  if  X  signed  the  note  as  a  member  of  the 
firm. 

(b)  Accounts  Payable  might  be  credited  if  the  agreement  with  the  creditor 
provides  that  the  note,  although  a  liability  solely  of  X's,  is  to  be  paid  by  the 
partnership  to  the  payee. 

(c)  If  it  is  agreed  among  the  partners  that  the  money  secured  by  X  is  to  be 
considered  as  a  special  loan  to  the  partnership,  the  cash  received  would  be  cred- 
ited to  X — Loan  Account,  no  matter  whether  evidenced  by  a  note  from  the  partner- 
ship or  not. 

(d)  X — Capital  Account  should  be  credited  if  the  partners  look  upon  the 
cash  received  as  additional  capital  invested.  The  treatment  would  depend  en- 
tirely on  the  facts  in  the  case. 

Answer  to  Question  10~ 

(a)  Interest  of  $52,500  on  bonded  and  other  indebtedness  should  be  excluded 
in  preparing  a  statement  setting  forth  the  earning  power  of  a  business,  on  the 
ground  that  interest  in  this  case  is  a  division  of  profits  rather  than  expense 
of  operation. 

(b)  The  profit  of  $5,000  arising  from  the  sale  of  property  is  not  one 
relating  to  the  ordinary  operations  of  the  business,  i.e.,  from  the  manufacture 
and  sale  of  a  product  or  from  trading  operations.   If  the  item  were  included 

in  the  statement  of  profits  and  income  at  all,  it  would  be  included  as  "Ex- 
traordinary Profits"  and  taken  up  after  arriving  at  the  profits  pertaining 
strictly  to  the  ordinary  business  operations. 

(c)  There  is  some  question  as  to  whether  or  not  the  litigation  expense  of 
$25,000  should  be  excluded.   More  information  would  have  to  be  obtained  in 
regard  to  the  character  of  the  business  of  the  company  for  whom  the  statement 
of  profits  is  to  be  prepared.   The  word  "patent"  suggests  that  the  company 

is  manufacturing  a  patented  article  which  may  or  may  not  conflict  with  patents 
granted  to  others.  The  charge  would  probably  be  made  against  the  current 
period's  income  as  an  extraordinary  expenditure  unless  a  reserve  had  been 
previously  created  to  cover  the  probable  liability.  In  that  case  it  would  be 
charged  against  the  reserve, 

(d)  Management  salaries  are  at  all  times  proper  charges  against  the  cost 
of  doing  business  and  go  in  reduction  of  the  NET  operating  profits.  The 
amount  of  $100,000  suggests,  however,  that  the  payment  in  respect  of 
management  salaries  is  perhaps  disproportionate  to  the  business  done  and  is, 
therefore,  in  effect  a  partial  division  of  profits.   This  is  particularly 
true  if  the  managers  are  the  stockholders  or  owners  of  the  business.  If 
this  condition  existed  it  would  appear  desirable  to  set  out  the  amount  of 
the  management  salaries  on  the  face  of  the  statement  of  profits. 

Copyright,  1919,  The  Ronald  Press  Company 


II-4-11 

(e)  It  would  be  excluded,  partnerships  being  no  longer  subject  to  such 
tax. 

(f )  Interest  on  capital  accounts  would  also  be  excluded.  There  would 
be  no  need  of  making  any  reference  to  such  interest  in  the  statement  of 
profits  except  for  the  general  information  conveyed. 


CAPITAL  AND  REVENUE  EXPENDITURES 

1.  ACCOUNTS  TO  BE  CHARGED — Expenditures  involving  the  extension  or 
maintenance  of  capital  assets  should  be  charged  to: 

(a)  Property  Account 

(b)  Depreciation  Reserve 

(c)  Deferred  Charges 

(d)  Operating  Expenses 

(e)  Profit  and  Loss 

(f)  Surplus,  or 

(g)  Improvement  Reserve 

depending  on  the  character  and  purpose  of  the  expenditure. 

2.  BASES  UNDERLYING  THE  DETERMINATION  OF  THE  ACCOUNT  TO  BE  CHARGED— 

The  following  is  an  extract  from  Mr.  Dickinson's  paper  on  "Profits  of  a 
Corporation"  relating  to  construction  expenditures: 

■In  completing  the  survey  of  the  conditions  so  far  as  regards  Capital 
Assets,  it  is  well  to  consider  what  expenditures  may  reasonably  be  added  to  the 
original  investment  of  Capital,  instead  of  being  charged  against  Profits. 
These  expenditures  may  be  divided  into  the  following  general  classes: 

"(a)  Actual  additions  to  the  property,  such  as  new  buildings,  new  engines 
or  new  tools,  which  did  not  exist  before,  or  additions  to  existing  articles 
of  this  class.  All  such  expenditure  would  be  at  once  admitted  as  a  proper 
charge  to  Capital  Account. 

"(b)  Alterations  to  Capital  Assets  resulting  in  increased  capacity,  some 
portion,  but  not  the  whole  of  which  in  most  cases  may  be  charged  to  Capital 
Account. 

■(c)  Alterations  to  Capital  Assets  resulting  not  in  increased  capacity  but 
in  a  lower  cost  of  output.   Such  items  are  frequently  treated  as  additions 
to  Capital  Account,  even  by  conservative  corporations,  but  it  may  be  doubted 
whether  they  should  not  rather  be  considered  as  operating  expenses  paid  in 
advance,  especially  if,  as  in  most  manufacturing  concerns,  the  processes  to 
which  the  improvements  are  applied  have  only  a  limited  life,  after  which  they 
will  be  superseded  by  other  and  more  modern  ways  of  doing  the  same  thing. 
In  other  words,  the  most  conservative  way  of  treating  this  class  of  ex- 
penditures would  be  to  consider  them  as  deferred  charges  to  operating  to  be 

Copyright,  1919,  The  Ronald  Press  Company 


II-4-12 

written  off  over  a  definite  term  of  years  against  Profits.  Among  this  class 
may  be  mentioned  change  of  grade  or  alignment  in  railroads  which  is  too 
frequently  treated  as  a  capital  charge  ;  the  shifting  of  machinery  from  one 
position  to  another,  or  a  general  rearrangement  of  a  factory;  as  well  as 
stripping  and  development  work,  on  mineral  lands,  which  is  of  a  capital 
nature  in  so  far  as  it  is  money  sunk  in  the  property  prior  to  taking  anything 
out  of  it,  but  in  all  conservatively  managed  mines  is  treated  in  the  way 
indicated  above. 

"(d)  Alterations  to  capital  assets  resulting  partly  in  increased  output 
and  partly  in  decreased  operating  expenses.   In  this  class  much  must  depend 
on  the  nature  of  the  expenditure,  but  a  division  between  capital  and  operat- 
ing accounts  on  some  definite  basis  arrived  at  on  the  principles  outlined  in 
(b)  and  (c)  would  as  a  rule  be  fair  and  conservative  treatment. 

"(e)  Exceptional  and  extraordinary  renewals  of  existing  assets  resulting 
partly  in  the  increased  capacity  necessary  in  order  to  keep  pace  with  more 
modern  plants,  partly  in  diminished  operating  expenses  and  partly  in  a  mere 
replacement.   Such -expenditures  include  the  modernizing  of  a  property 
necessary  to  prevent  or  to  repair  a  deterioration  in  its  value,  due  either  to 
the  comp'etition  of  more  modern  properties  or  to  the  greater  demands  of  the 
public,  and  consequently  not  resulting  in  increased  earnings.   Here  again  many 
corporations  will  charge  part  of  such  expenditures  to  Capital  Account,  and 
would  be  'legally  justified  in  so  doing;  but  undoubtedly  the  sane  and  conserva- 
tive course  is  to  charge  them  wholly  against  Profits  through  the  medium  of  a 
Depreciation  or  Improvement  Fund. 

"(f)  Finally,  we  have  ordinary  replacements,  repairs  and  renewals  recurrent 
either  at  long  or  short  intervals,  and  resulting  neither  in, increased  capacity 
nor  in  saving  in  operating  expenses.   Such  would  always  be  a, charge  against 
Profits,  either  through  the  Depreciation  Fund  or  direct,  according  to  the 
nature  of  the  outlay." 

•  3.  BASIS  UNDERLYING  THE  DETERMINATION  OF  THE  AMOUNT  AT  WHICH  THE  CHARGE 
SHOULD  BE  MADE— 

"It  is  important  to  note  that  the  charges  made  under  any  of  the  above 
headings  should  be  cost  only  and  should  not  include  any  addition  by  way  of 
Profit.  The  operation  is  merely  a  conversion  of  Current  into  Fixed  Assets, 
upon  which  no  Profit  can  be  realized  as  long  as  the  Asset  is  maintained. 
Possibly,  however,  where  a  corporation  employs  in  the  erection  of  plant  for 
its  own  purposes  facilities  which  it  would  otherwise  be  employing  in  similar 
erections  for  outsiders  at  a  Profit,  it  would  be  fair,  although  not  con- 
servative, to  consider  a  reasonable  charge  for  the  use  of  thes'e  facilities  as 
part  of  the  cost  of  erection.  Also  when  special  loans  are  raised  for  con- 
struction purposes,  the  interest  on  such  loans  during  the  period  of  construc- 
tion would  fairly  be  part  of  the  cost. 

"SALE  OF  FIXED  ASSETS.   If  Fixed  Assets,  becoming  unnecessary  for  the 
purposes  of  the  business,  are  sold  or  are  abandoned  and  dismantled,  the 
question  arises  whether  Profit  or  Loss  arising  therefrom  should  be  added  to  or 

Copyright,  1919,  The  Ronald  Press  Company 


II-4-13 

deducted  from  the  Profit  arising  from  the  general  operations.  Legally,  if 
as  a  result  of  a  revaluation  of  Capital  Assets  a  surplus  was  found  to  exist, 
the  realised  portion  thereof  may  probably  be  treated  as  a  Profit,  but  not 
otherwise;  and  on  the  other  hand  there  would  not  appear  to  be  any  legal 
necessity  to  provide  for  a  loss.  As  a  matter  of  accounting,  the  safe  policy 
is  to  carry  forward  Profits  and  provide  for  Losses,  but  the  circumstances  in 
each  case  must  be  considered.  Where  the  losses  are  large,  as  in  the  case  of  the 
dismantling  of  a  whole  plant,  it  would  be  sufficient  to  provide  for  it 
gradually  out  of  the  profits  of  a  series  of  years." 

The  following  is  an  extract  from  Mr.  Dickinson's  paper  "Special  Points 
in  Corporation  Accounting": 

"In  the  paper  dealing  with  the  'Profits  of  a  Corporation,*  to  which 
reference  has  already  been  made,  some  general  rules  were  laid  down  as  to 
different  classes  of  expenditures,  which  might  be   legitimately  considered  as 
an  addition  to  capital  assets,  and  it  is  now  proposed  to  consider  the  equally 
important  point  of  the  method  of  ascertaining  the  amount  of  such  expenditures 
when  the  work  is  carried  out  by  the  corporation  itself, 

■The  problems  involved  in  the  determination  of  the  proper  charges  to  be 
made  for  construction  work  are: 

"Firstly,  to  correctly  ascertain  the  actual  labor  and  material  expended 
thereon,  which  if  proper  records  be  kept,  is  a  comparatively  easy  matter,  and 

"Secondly,  to  determine  the  amount,  if  any,  which  should  be  added  to  these 
direct  costs  for  general  and  management  expenses,  and  possibly  for  interest. 

"In  a  going  concern  a  conservative  course  is  generally  adopted,  and  no 
charge  is  made  beyond  the  labor  and  material  cost,  for  expenditures  of 
moderate  amount  on  additions  to  the  property;  but,  on  the  other  hand,  if  a  new 
and  distinct  plant  were  in  course  of  construction,  and  producing  no  earnings 
from  operation,  the  whole  of  the  administration  expenses,  and  the  interest 
paid  on  Loans  raised  for  this  special  purpose  would  be  charged  to  construc- 
tion account,  and  rightly  so  being  necessary  elements  of  completing  the  work. 
This  at  once  suggests  the  argument  that  what  is  reasonable  £ind  proper  in  the 
latter  case  should  also  be  reasonable  and  proper  in  the  former,  particularly 
if  facilities  are  employed  which  would  otherwise  be  used  on  profitable  work 
for  outside  parties.   It  must,  however,  be  remembered  that  profits  can  only 
be  made  out  of  the  sale  of  products;  and  that  it  is,  therefore,  incorrect 
that  a  concern  should  take  credit  for  profits  on  work  which  is  not  intended  for 
sale,  and  will,  in  all  probability,  never  be  sold  as  long  as  the  concern  is 
continuing  to  carry  on  business, 

"It  would  follow  then  that  no  charges  should  be  made  to  construction  for 
expenses  which  would  have  been  equally  incurred  if  there  had  been  no  such 
construction,  and  would  in  that  case  have  been  charged  against  profits  ; 
although  if  special  loans  have  been  raised  to  provide  funds  for  construction 
purposes,  and  a  special  staff  of  employes  maintained  for  this  sole  purpose, 
it  would  seem  quite  legitimate  that  the  interest  paid  on  such  loans,  and  the 
salaries  of  the  special  staff,  should  be  charged  to  Construction  Account  until 
the  work  under  construction  is  in  full  operation.  Any  other  method  might 
result  in  the  creation  of  paper  or  fictitious  profits,  which  would  not  be  real- 
ized as  long  as  the  property  was  operated,  and  might  never  be  realized  on  an 
ultimate  sale  thereof.  A  good  instance  is  the  case  of  a  railroad  building 

Copyright,  1919,  The  Ronald  Press  Company 


II-4-14 

large  extensions,  the  material  for  which  in  considerable  quantities  is  carried 
over  its  own  road.   The  freight  on  this  material  forms  part  of  the  earnings 
of  the  road,  and  if  the  new  construction  bears  a  large  proportion  to  the 
mileage  in  operation,  the  earnings  will  be  swelled  to  abnormal  proportions  by 
the  additional  traffic  so  created,  and  the  road  will  appear,  for  a  short 
period  to  be  earning  profits  entirely  out  of  proportion  to  those  derived 
from  its  normal  operations.   The  whole  of  this  increase  is  really  fictitious 
and  does  not  add  to  the  value  of  the  stock  in  any  way. 

"Managers  of  the  operating  departments  of  a  factory  frequently  claim  that 
they  should  be  allowed  to  charge  a  profit  on  construction  work  carried  out 
for  their  own  mills,  on  the  ground  that  if  the  work  were  done  outside  they 
would  have  to  pay  a  profit,  and  at  the  same  time  would  set  free  their  own 
facilities  to  carry  out  additional  work  at  a  profit  for  outside  customers; 
and  they  even  go  so  far  as  to  say  that  if  they  cannot  charge  a  profit  on 
construction  work  so  carried  out,  they  will  in  future  have  the  work  done  on 
outside  contracts.   It  must  be  admitted  that  this  is  a  plausible  argument, 
but  a  little  further  consideration  will  show  that  it  is  fallacious.   There  is 
here  a  confusion  between  a  Profit  and  a  Saving.   The  reason  that  a  concern 
undertakes  its  own  construction  work  in  place  of  letting  outside  contracts 
therefor,  is  that  it  can  by  that  means  effect  a  saving  in  its  expenditure,  by 
taking  advantage  of  its  own  capital  and  facilities  to  carry  out  the  work 
instead  of  using  the  organization  and  the  capital  of  others,  upon  which  it 
would  have  to  pay  a  profit.   The  saving  so  effected  is  of  considerable 
advantage  in  that  it  reduces  the  amount  of  capital  invested  and  future  earn- 
ings will  represent  a  larger  return  on  the  investment.   Moreover,  it  is 
seldom  true  that  the  use  of  a  corporation's  own  facilities  for  construction 
expenditure  really  means  the  throwing  av;ay  of  profitable  work  for  outsiders, 
which  would  otherwise  have  been  undertaken.  It  is  doubtful  if  any  well  managed 
concern  ever  refuses  profitable  orders,  because  of  its  own  construction  work; 
its  organization  can  and  will,  almost  automatically,  expand  sufficiently  to 
provide  for  any  increase  in  its  operations  which  is  likely  to  be  thrown  upon 
it.  Moreover,  if  a  sum  be  added  to  the  cost  of  construction  and  credited  to 
profit  and  loss,  to  represent  the  profit  which  would  have  been  earned  by  the 
Company  if  the  work  had  been  done  for  outsiders  instead  of  for  itself,  this 
profit  can  only  be  made  available  for  distribution  by  increasing  the  amount 
of  capital  contributed  for  new  construction  work;  and  it  can  hardly  be  con- 
sidered good  financial  policy  to  increase  indebtedness  for  the  purpose  of 
paying  dividends.   The  only  sound  principle  that  can  be  adopted  is  to  charge 
to  construction  all  costs  and  expenses  which  are  directly  attributable  to 
that  construction,  but  nothing  for  indirect  expenses,  interest  or  profit." 

REFERENCES : 

Kester,  Vol.  II,  pages  87-97 


Copyright,  1919,  The  Ronald  Press  Company 


II-5-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  5 
DEPRECIATION 


Problem  13 

A  meeting  of  bondholders  and  creditors  was  held  July  10,  1918,  to 
consider  the  advisability  of  extending  the  indebtedness  of  the  Miller  Motor 
Car  Co.  so  as  to  enable  the  company  to  recover  from  the  fire  which  had  de- 
stroyed the  plant.  After  due  consideration  of  the  statement  of  affairs  dated 
July  6,  1918,  it  v/as  agreed  to  grant  an  extension  of  one  year  on  condition 
that  the  stockholders  raise  $200,000  to  be  used  for  the  immediate  rebuilding 
of  the  plant. 

On  July  12,  1918,  a  meeting  of  the  stockholders  was  held  to  consider 
the  proposition  submitted  by  the  creditors.   The  stockholders  expressed  their 
inability  to  raise  the  required  funds,  whereupon  by  resolution  duly  passed 
it  was  resolved  to  dissolve  the  company.   The  Central  Trust  Compeuiy  was 
requested  to  act  as  receiver. 

August  6,  1918,  the  receiver  reported  as  follows; 

COLLECTIONS 
Notes  Receivable  and  accrued  interest        ^       $  52,253.25 
Accounts  Receivable  49,480.22 

Insurance  Company — covering  loss  sustained  on 

buildings,  machinery,  trucks,  and  fixtures  100,000.00 

Salvage  from  machinery,  tools,  equipment,  and 

fixtures  30,000.00 

Salvage  from  inventories  (merchandise  stock  was 

not  insured)  10,000.00 

Land,  less  commission  44,100.00 

Investment  100,000.00 

DISBURSEMENTS 
Wages  and  taxes  paid  in  full.  The  bonds  were 

paid  off  together  with  interest  amounting  to       $  5,850.00 
Audited  Vouchers  60,144.12 

Expenses  9,842.78 

Remaining  assets  are  worthless  and  there  are  no  further  liabilities 
to  be  paid. 

Prepare  balance  sheet,  cash  account,  and  statement  showing  results  of 
the  realization  and  liquidation  to  date  and  state  what  dividend  (if  any)  may 
be  expected  by  the  stockholders. 

Also  prepare  the  journal  entries  to  close  the  books  of  the  Miller 
Motor  Car  Co.,  showing  separately  the  loss  by  fire  and  the  loss  on  liquidation 
of  the  business. 

Copyright,  1919,  The  Ronald  Press  Company 


II-5-2 


MISCELLANEOUS  QUESTIONS 


Question  21 — What  is  your  understanding  of  the  following  terms: 

(a)  Opening  entries 

(b)  Closing  entries 

(c)  Adjusting  entries. 

Question  22 — What  is  your  understanding  of  the  following  terms: 

(a)  Accrued  Interest  on  Bills  Receivable  and  Bills  Payable. 

(b)  Insurance  Unexpired. 

(c)  Rents  Paid  in  Advance. 

How  should  each  of  these  items  be  classified  in  a  balance  sheet?  Illus- 
trate the  character  of  items  you  would  find  in  such  accounts. 

Question  25 — A  corporation  which  had  its  financial  statements  prepared 
for  the  year  ending  December  31,  1918,  contemplates  making  a  substantial 
addition  to  its  reserve  for  depreciation  as  of  December  31,  1918.  What 
effect  will  this  have  on  the  various  balance  sheet  accounts  and  how  will 
working  capital  be  affected? 

Question  24 — During  an  examination  of  the  books  of  a  certain  company  the 
following  entries  are  submitted  for  your  approval: 


Investment  in  other  Companies  (5%  stock 
interest) 

To — Dividends  Received  Account 
For  proportion  of  estimated  dividend 
expected  to  be  paid  on.........  on  the 

capital  stock  of  the  A  Mfg.  Co. 


$10,000.00 


$10,000.00 


(2) 

Property  Account  15,000.00 

To— Surplus  Account  15,000.00 

To  write  up  the  book  value  of  certain  land 
and  buildings  per  instructions  of  the 
general  manager. 

(3) 

Depreciation  Reserve  18,500.00 

To — Depreciation  (Profit  and  Loss)  18,500.00 

To  write  back  the  provisions  for 
depreciation  for  the  year  1918. 

What  would  be  your  comment  in  each  case? 

Question  25 — Draft  a  form  of  cash  book  suitable  for  a  trading  concern 
that  has  two  sales  ledgers,  accounts  payable  or  voucher  record,  and  a  private 
ledger,  all  of  which  are  balanced  separately;  the  system  to  provide  that 
(a)  all  receipts  be  deposited  intact  and  (b)  all  disbursements  be  made  by  the 
use  of  a  combination  voucher-check. 


Copyright,  1919,  The  Ronald  Press  Company 


II-5-3 


Solution  to  Problem  7 


A  &  B  PARTNERSHIP 
REALIZATION  AND  LIQUIDATION  ACCOUNT 
(Date) 


ASSETS  TO  BE  REALIZED: 
Customers         $ 
Inventories 
Real  Estate 
Buildings 
Machinery  and 

Equipment 
Tools  and  Fixtures 


94,100 
95,250 
33,000 
96,000 

82,800 

13,250  $414,400 


LIABILITIES  TO  BE  LIQUIDATED: 
Mtge.  Obligation   $125,000 
Bills  Payable       145,000 
Trade  Creditors      95,000  $365,000 


LIABILITIES  LIQUIDATED: 

Mtge.  Obligation  $125,000 
Bills  Payable  105,231 
Trade  Creditors      68,944  299,175 


LIABILITIES  NOT  LIQUIDATED: 
Bills  Payable      $  39,769 
Trade  Creditors      26,056 


EXPENSES 


ASSETS  REALIZED: 
Customers 
Inventories 
Real  Estate 
Buildings 
Machinery  and 

Equipment 
Tools  and 

Fixtures 

LOSS  ON  REALIZATIO 
AND  LIQUIDATION 


82,000 
84,500 


130,000 


296,500 


118,400 


65,825 


Balance  Carried  Forward 
Customers 
Inventories 
Property  Assets 


500 

$779,900 

CASH 

rd       $  3,175 

82,000 

84,500 

5,000 

ACCOUNT 

Expenses 
Bills  Payable 
Trade  Creditors 

$174,675 

$779,900 


>  500 

105,231 

68,944 


$174,675 


Copyright,  1919,  The  Ronald  Press  Company 


II-5-4 

Solution  to  Problem  8 


COMPANY 

STATEMENT  OF  AFFAIRS 
DECEMBER  31,  1918 


Book  or  Cost 
Value 


Expected 


Gross 


Expected 


ASSETS 


CURRENT  ASSETS: 
\         400   Cash 
152,000   Trade  Accounts 

Good  $  85,000 
Doubtful 

(50% 

good)  35,000 
Bad      32,000 


33,000 


50,000 


105,000 


$340,400 


$152,000 


Notes  Receivable 
Good    $  22,000 
Doubtful 
(50% 

good)    8,000 
Bad       3 , 000 


To  Realize  Liabilities    LIABILITIES     to  Rank 

PREFERRED  CLAIMS: 
$    400  $  3,000   Wages  Deducted — 
102,500  per  contra 

FULLY  SECURED  CREDITORS: 
50,000   Bills 

Payable  $50,000 
DEDUCT— 
Security- 
held 
there- 
against 
(per 
26,000  contra)   $50,000 


$  33,000 


First  Mtge, 
6%  Bonds 

DEDUCT— 
Bills 
Payable 
(per 
contra) 


50,000 


Inventory  of  Mdse, 
(less  $30,000 
per  contra) 


75,000 


50,000   First  Mtge.  6% 

Bonds  Deducted— 
per  contra 


PARTIALLY  SECURED  CREDITORS: 
45,000   Trade 

Creditors  $45,000 
DEDUCT— 
Va?.ue 
of  Mdse.   30,000  $  15,000 


UNSECURED  CREDITORS: 
275,000   Trade 

Creditors$275,000 
4,800   Bank  Over- 
draft     4,800  279,800 


$203,900  $427,800   Total  Liabilities   $294,800 


Copyright,  1919,  The  Ronald  Press  Company 


II-5-5 


PROPERTY  ASSETS: 
$  95,000  Real  Estate, 
Bldgs.  & 
Other 

Assets   $95,000 
DEDUCT— 
First 
Mtge.  Q% 
Bonds 
(per 
contra)   50,000   45,000 


$248,900 


3435,400  Total  All  Assets 
DEDUCT — Preferred 

Claims  (per  contra)   3,000 


Net  Free  Assets 
Balance — Deficiency 
to  Creditors 


$245,900 

48,900 

$294,800 


$294,800 


192,400  Deficiency  per  books 
Deficiency  to 
Stockholders 


$627,800 


$200,000  $200,000   Capital  Stock 


$200,000   $627,800 


$200,000 
$200,000 


DEFICIENCY  ACCOUNT 


Deficiency  at  January  1,  1919 
Losses  from  Operations  for 

the  Fiscal  Year  Ending 

December  31: 

1917  $80,050 

1918  39,350 


$  33,000 


Dividends  Declared  and  Paid 
Estimated  Loss  on  the  Real- 
ization of  Assets — per 
Statement  of  Affairs: 
Notes  Receivable  $  7,000 
Ordinary  Trade 

Accts,         49,500 


119,400 
40,000 


56,500 
$248,900 


Original  Investment  of 
Stockholders  Represented 
in  Capital  Stock  Issued 
and  Outstanding 

Balance — Deficiency  to 
Creditors  as  per  State- 
ment of  Affairs 


$200,000 
48,900 


$248,900 


Copyright,  1919,  The  Ronald  Press  Company 


II-5-6 


Solution  to  Problem  9 


JOURNAL  ENTRIES 


(1) 
August  Miller,  Capital 

To — Accommodation  Paper 

To  charge  A.  Miller  with  liabilities  to 

be  paid  by  the  firm. 


$  6,000.00 


$  6,000.00 


(2) 
Notes  Receivable  Discounted  10,000.00 

To — Notes  Receivable  10,000.00 

To  transfer  the  credit  from  Notes 

Receivable  Discounted  Account  to  Notes 
Receivable  Account. 

(3) 
Realization  and  Liquidation  Account  79,582,00 

To — Notes  Receivable  100.00 

Customers'  Accounts  35,542.00 

Merchandise  Inventory  39,090.00 

Miscellaneous  Supplies  300.00 

Delivery  Equipment  1,750.00 

Fixtures  1,450.00 

Advances  on  Consignments- Inward  1,100,00 

Unexpired  Insurance  50.00 

Rent  Paid  in  Advance  200.00 
To  transfer  assets  to  be  realized  to 
Realization  and  Liquidation  Account. 

(4) 
Taxes  Accrued  200,00 

Notes  Payable  10,000.00 

Accounts  Payable  36,080.00 

Bank  Loan  3,000.00 

Interest  Accrued  on  Notes  Payable  36.00 

Accommodation  Paper  6,000.00 

To — Realization  and  Liquidation  Account  55,316.00 

To  transfer  liabilities  to  be  liquidated 
to  Realization  and  Liquidation  Account. 

(5) 
Cash  52,725.92 

To — Realization  and  Liquidation  Account  52,725,92 

Assets  Realized: 

Customers'  Accounts  $23,000.42 

Merchandise  Inventory         26,500.50 
Miscellaneous  Supplies  100.00 

Delivery  Equipment  1,340.00 

Fixtures  785.00 

Advances  1,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-5-7 


(6) 

Realization  and  Liquidation  Account  $54,316.00 

To — Cash  $54,316.00 

Liabilities  Paid: 

Notes  Payable  $10,000.00 

Accounts  Payable  36,080.00 

Taxes  Accrued  200.00 

Accommodation  Paper  5,000.00 

Bank  Loan  3,000.00 

Interest  Accrued  on  Notes 

Payable  36.00 

(7) 
Realization  and  Liquidation  Account  1,544.70 

To— Cash  1,544.70 

Expense  paid. 

(8) 
Realization  and  Liquidation  Account  1,000.00 

To — Realization  and  Liquidation  Account  1,000.00 

Accommodation  paper  renewed. 


Copyright,  1919,  The  Ronald  Press  Company 


II-5-8 


Solution  to  Problem  9 


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Copyright,  1919,  The  Ronald  Press  Company 


II-5-9 

MILLER  BROTHERS 
BALANCE  SHEET 
JULY  2,  1918 

Cash  $  642.06  Accommodation  Paper         $1,000.00 

Fred  Miller,  Capital         1,308.62  August  Miller,  Capital         950.68 


$1,950.68  $1,950.68 


STATUS  OF  PARTNERS'  ACCOUNTS 

PARTICULARS  FRED  MILLER  AUGUST  MILLER    TOGETHER 

Capital,  April  30,  1918  $17,625.23    $16,417.61    $34,042.84 


Accommodation  Paper  $  6,000.00    $  6,000.00 

Loss  on  Realization  $18,933.85      9,466.93     28,400.78 


Total  Deductions  $18,933.85    $15,466.93    $34,400.78 


Capital,  July  2,  1918  *$  1,308.62    $   950.68   *$   357.94 

♦Red. 

ANSWERS  TO  QUESTIONS 

Answer  to  Question  11 — The  following  is  a  list  of  the  principal  books  of 
accounts  usually  kept  by  a  firm  or  company: 

General  ledger 

General  journal 

Audited  voucher  record 

Cash  book 

Sales  record 

Goods  returned  record 

Allowance  register 

The  exact  rulings  and  headings  used  would  vary  to  a  considerable  extent 
according  to  the  nature  of  the  business. 

Answer  to  Question  12 — 

(a)  Book  profits,  briefly  speaking,  are  unrealized  profits  and  arise  from 
the  writing  up  of  an  asset;  e.g.,  a  piece  of  real  estate  purchased  for,  say, 
$25,000  is  written  up  to  $30,000,  which  presumably  is  the  real  value  at  the 
date  the  cost  value  was  written  up.   The  difference  of  $5,000  would  be  referred 
to  as  a  book  profit.   The  valuation  of  an  inventory  at  a  price  in  excess  of 
cost  would  also  create  a  book  profit  to  the  extent  of  the  difference  between 
cost  and  the  inventory  value  as  determined.   "Book  profits"  is  a  technical 
term  and  has  no  relation  to  the  term  "profits  as  per  books." 

Copyright,  1919,  The  Ronald  Press  Company 


II-5-10 

(b)  Inventory  reserves  are  reserves  created  out  of  profits  for  the  purpose 
of  providing  for  a  possible  loss  on  the  sale  of  stocks  of  merchandise. 
Generally  speaking,  the  need  for  such  a  reserve  arises  from  a  drop  in  the 
market  price  below  the  cost  price  of  merchandise,  and  following  out  the 
accounting  principle  that  inventories  should  be  valued  at  cost  or  market, 
whichever  is  the  lower,  it  becomes  necessary  to  provide  for  this  possible 
loss.   Then  again,  finished  products  carried  over  from  one  season  to  another 
generally  are  disposed  of  at  a  sacrifice,  and  in  such  case  it  becomes 
necessary  to  make  some  provision  for  the  probable  loss  on  the  realization  of 
the  stocks.   The  transactions  that  would  enter  into  an  Inventory  Reserve 
account  are  illustrated  thus: 

INVENTORY  RESERVE  ACCOUNT 

DEBIT  WITH  CREDIT  WITH 

Total  losses  sustained  on  the  Total  provision  during  the  period 

realization  of  stocks  of  mer-  for  the  estimated  loss  on  the 

chandise  against  which  the  reserve  realization  of  the  stocks  of  mer- 

was  credited — contra  a  credit  to  chandise — contra  a  debit  to  Profit 

Merchandise  or  Stock  accounts.  and  Loss  account. 

(c)  Contingent  liabilities  are  liabilities  which  may  become  real  lia- 
bilities under  certain  conditions. 

Answer  to  Question  15— 

The  deduction  of  the  credit  balances  from  the  asset  of  uncollected  cus- 
tomers' accounts  has  the  effect  of  understating  the  assets  and  liabilities 
respectively,  which  obviously  is  incorrect.   There  would  be  as  much  justi- 
fication in  deducting  ALL  liabilities  from  the  assets  and  bringing  down  the 
net  difference  as  representing  the  assets.  The  item  in  question  is  a  liability 
and  under  ordinary  circumstances  would  be  discharged  by  (1)  payment  in  cash  or 
(2)  a  subsequent  sale  of  goods  to  be  applied  in  the  reduction  of  the  credit 
balances  arising  from  allowances  for  defective  goods,  etc. 

Answer  to  Question  14— 

(a)  Bad  Debts  Suspense,  $13,103.93.  From  the  title  of  the  account  it 
would  appear  that  it  is  more  or  less  of  a  doubtful  nature,  indeed,  if  not 
entirely  irrecoverable.   The  facts  would  have  to  be  ascertained  and  then  full 
provision  made  for  any  possible  loss  on  the  realization  of  the  accounts. 

The  reserve  created  should,  of  course,  be  deducted  from  the  assets  so  that  the 
balance  sheet  would  reflect  the  estimatea  realizable  value  of  the  accounts, 

(b)  President's  Drawing  account,  $10,500.  The  carrying  forward  of 

such  an  account  is  rather  unusual  and  apparently  would  call  for  special  in- 
quiry to  determine  (1)  upon  whose  authority  the  moneys  were  advanced  and  (2) 
whether  or  not  it  is  collectible.   Generally  speaking,  the  item  should  be  set 
out  separately  under  the  general  heading  of  Accounts  Receivable  as  "Officers* 
Accounts." 

(c)  Consignment  Stocks,  $51,708.25,  are  part  of  the  inventories  and  should 
not  be  classified  among  the  Accounts  Receivable.   It  is  desirable,  however. 

Copyright,  1919,  The  Ronald  Press  Company 


II-5-11 


that  they  be  priced  at  cost  and  shown  separately  under  the  heading  of  Inven- 
tories, as  follows: 

Inventories: 

Finished  Stock,  Work  in  Progress, 

Raw  Materials,  etc,  $ 

Consignment  Stocks  


(d)  Working  Funds,  $1,250,  undoubtedly  represent  the  funds  in  the  hands  of 
cashiers  for  petty  cash  requirements  and  are,  therefore,  part  of  the  cash 
resources  if  intact.  The  amount  should  be  shown  under  the  heading  of  cash, 
as  "Cash  on  Hand"  or  "Working  Funds," 

Answer  to  Question  15-- 

BITTER  HILLS  CREAMERY  CO. 


Consignment  No,  18673- 

- 

July  1 

Freight 

$   123.50 

July 

14 

Sales 

47  1/2 

$  4,750.00 

1 

Cartage 

45,75 

■ 

20 

Sales 

48  1/3 

5,800,00 

20 

Storage 

39.45 

N 

20 

Stock 

48 

1,440.00 

■   25 

Commission 

1,199.00 

"   25 

Cash  Discount 

105.82 

"   25 

Check  #4751 

10,476.48 

$11,990.00 

$11,990.00 

The  above  is  a  summary  of  the  account  sales  that  would  be  prepared  for  the 
consignor.  An  account  sales  and  carbon  copy  may  be  headed  up  as  soon  as  the 
consignment  is  received;  this  will  serve  as  a  ledger  account  to  which  charges 
and  credits  may  be  posted  immediately.   It  is  of  prime  importance  that  the 
consignments  be  posted  up  to  date;  hence,  in  such  a  business,  ledgers  are 
posted  before  journal  entries  are  made.   Controlling  accounts  are  necessary, 
however,  to  verify  clerical  accuracy;  for  a  discussion  of  these  in  connection 
with  the  keeping  of  consignment  accounts,  see  Part  I,  Lecture  11, 


DEPRECIATION 

NATURE  OF  DEPRECIATION— Depreciation  is  the  term  applied  to  the  loss  in 
value  of  an  asset  due  to  wear  and  tear  in  use;  lapse  of  time  even  though  not 
in  use;  obsolescence  or  inadequacy  due  to  the  invention  of  substitutes,  or 
change  in  design  which  renders  the  asset  useless  for  the  purpose  for  which  it 
was  acquired. 

In  Hatfield's  "Modern  Accounting"  there  is  an  excellent  introduction  to  the 
chapter  on  depreciation  and  it  might  not  be  amiss  to  quote  therefrom: 

■Destruction  is  the  law  of  nature.   Fixed  capital,  using  the  term  here  in 
its  economic  rather  than  in  its  accounting  sense,  despite  its  name,  is  not 

Copyright,  1919,  The  Ronald  Press  Company 


II-5-12 

exempt  from  this  law.  Even  so-called  permement  improvements,  such  as  build- 
ings, are  all  subject  to  the  ravages  of  time,  which  Marshall  aptly  defines 
as  'the  complex  of  destructive  agencies, '  All  machinery  is  on  an  irresistible 
march  to  the  junk-heap,  and  its  progress,  while  it  may  be  delayed,  cannot  be 
prevented  by  repairs," 

FACTORS  DETERMINING  AMOUNT  OF  DEPRECIATION— 

1.  ORIGINAL  COST  LESS  SCRAP  VALUE.  The  cost  of  an  asset  less  the 

residuary  scrap  value  constitutes  the  amount  to  be  provided  for, 

2.  DISMANTLING.   In  determining  the  residuary  second-hand,  scrap,  or 

junk- value  of  an  asset  allowance  must  be  made  for  the  expense 
incidental  to  the  removal  of  the  old  asset  when  the  replacement 
occurs. 

3.  LIFE.   The  original  cost  less  scrap  value  should  be  charged  off 

within  the  estimated  time  during  which  that  asset  may  be  used  in 
operation. 

4.  REPAIRS.   The  estimated  life  of  an  asset  depends  to  a  material 

extent  on  the  character  of  the  periodical  repairs, 

5.  USE,  The  estimated  life  of  an  asset  depends  to  a  material  extent 

on  the  manner  in  which  it  is  used, 

METHODS  OF  PROVIDING  FOR  DEPRECIATION— 

1.  A  FIXED  PERCENTAGE  APPLIED  ON  A  FLAT  BASIS.   If  the  estimated  life  be 
ten  years,  one-tenth  of  the  estimated  depreciation  should  be  charged  off 
annually, 

2.  A  FIXED  PERCENTAGE  APPLIED  ON  THE  DIMINISHING  VALUE.   A  rate  is  ascer- 
tained which  if  applied  on  the  original  cost  and  on  the  balance  remaining 
after  applying  the  periodical  provision  for  depreciation  will  at  the  end  of 
its  estimated  life  reduce  the  book  value  of  the  asset  ;to  its  estimated  scrap 
value. 

3.  SINKING  FUND  OR  ANNUITY.   An  amount  is  periodically  set  aside,  the 
aggregate  of  which,  together  with  the  accumulated  interest,  will  equal  the 
estimated  depreciation  to  be  provided  for  during  the  estimated  life  of  the 
asset. 

4.  PRODUCTION.   The  periodical  provision  for  depreciation  may  be  based  on 
the  production  during  the  current  period,  and  during  the  estimated  life  of  the 
asset,  the  total  amount  provided  for  should  be  sufficient  to  reduce  the  book 
value  of  that  asset  to  its  estimated  scrap  value.   This  method  is  adapted  to 
cases  where  the  depreciation  accruing  bears  a  close  relation  to  the  volume  of 
production.   As  applied,  there  is  generally  a  minimum  and  maximum  to  the 
provision  to  be  made  in  any  one  period. 

5.  REVALUATION.   The  asset  is  revalued  each  year  and  the  difference  dis- 
closed by  the  revaluation  is  transferred  to  the  current  year's  operations. 
This  method  generally  speaking  is  not  a  practical  one,  unless  elaborate 
property  records  are  kept,  and  very  few  companies  are  willing  to  incur  the 
expense  incident  to  keeping  such  records.  So  far  as  small  tools,  horses,  etc., 
are  concerned  it  is  considered  the  preferable  method  of  providing  for  deprecia- 
tion as  it  tends  to  distribute  more  equitably  the  loss  in  value  against  each 
year's  operations. 

Copyright,  1919,  The  Ronald  Press  Company 


II-5-13 

6,  ARBITRARY  AMOUNT.   In  many  cases  the  provision  for  depreciation  is  not 
scientifically  determined.   The  amount  is  estimated  by  the  Board  of  Directors 
and  is  represented  by  an  appropriation  of  profits  at  the  end  of  the  year.  When 
it  is  deemed  desirable  to  reduce  the  surplus  profit  for  any  period  a  large 
provision  may  be  made  for  depreciation;  and  vice  versa,  where  a  large  profit 
showing  is  desired,  the  depreciation  provision  may  be  reduced  or  omitted. 
This  method,  therefore,  is  objectionable  since  it  permits  manipulation  of  the 
periodical  profit  and  loss  statement, 

ILLUSTRATION — Montgomery  illustrates  in  the  following  table  the  variations 
in  the  annual  provision  for  depreciation  under  the  first  three  methods,  as- 
suming the  cost  value  of  an  article  is  $1,000;  its  estimated  scrap  value  $100; 
and  its  estimated  life  ten  years. 


Year 


1 
2 
3 
4 
5 
6 
7 
8 
9 
10 


Compound  Inter- 
est at  5% 

Totals 


Fixed  Percentage 

Fixed  Percentage 

Sinking  Fund 

Method — 10%  on 

Method— 20.57% 

Method— At  5% 

Original  Value 

on 

Diminishing 

Compound 

Value 

Interest 

$  90.00 

$205.70 

$  71.55 

90.00 

163.38 

71.55 

90.00 

129.78 

71.55 

90.00 

103.08 

71.55 

90.00 

81.88 

71.55 

90.00 

65.03 

71.55 

90.00 

51.66 

71.55 

90.00 

41.03 

71.55 

90.00 

32.59 

71.55 

90.00 

25.87 

71.55 

$715.50 

184.50 

$900.00 

$900.00 

$900.00 

DEPRECIATION  RATES — No  definite  depreciation  rates  can  be  given,  as  this 
must  be  determined  by  the  character  of  the  property  and  the  manner  in  which  it 
is  used  and  repaired.   Some  rates  in  general  use  are: 


1.  Buildings,  1-1/2%  to  5%  per  annum 

2.  Machinery,  5%  to  10% 

3.  Furniture  and  fixtures,  10%  to  15% 

4.  Horses  and  wagons,  10% — Revaluation  preferable 

5.  Tools,  20%  to  33-1/3% — Revaluation  preferable 

6.  Electrical  lighting  plants,  4%  to  5% 

7.  Water  pumping  plants,  3/4%  to  1-1/2% 


IS  DEPRECIATION  AN  OPERATING  EXPENSE?— If  the  depreciation  provision  is  so 
calculated  as  to  represent  the  approximately  correct  charge  for  the  period, 
the  better  practice  is  to  include  same  as  a  manufacturing  expense.  But  where 
the  provision  represents  an  arbitrary  appropriation  which  may  be  grossly 


Copyright,  1919,  The  Ronald  Press  Company 


II-5-14 

excessive  or  deficient,  it  would  seem  that  the  better  practice  is  to  exclude 
it  from  the  manufacturing  account  and  show  the  item  as  a  deduction  from  the 
general  profit  and  loss. 

In  estimating  the  cost  of  production  there  must  be  considered  not  merely- 
material,  wages,  and  production  expenses,  "but  in  addition  some  allowance 
must  be  made  for  the  diminished  value  of  the  fixed  assets  due  to  gradual  loss 
of  serviceability.   Consequently  profits  are  not  determined  until  after  al- 
lowance has  been  made  for  depreciation.   Depreciation  is  not  a  disposition  of 
part  of  the  profits,  but  an  expense  without  which  profits  can  never  be  l^earned." 
(Hatfield.) 

If  the  life  of  the  asset  is  taken  as  the  fiscal  period  no  one  would  claim 
that  the  cost  value  of  the  asset  worn  out  in  producing  the  finished  product  was 
not  part  of  the  cost  of  such  product.  Where  the  fiscal  period  is  less  than 
the  life  of  the  asset,  the  depreciation  provision  is  merely  a  method  of  dis- 
tributing this  element  of  cost  over  the  fiscal  years  during  which  the  asset  was 
used. 

The  position  of  the  Interstate  Commerce  Commission  is  indicated  by  the 
following  extract: 

"When  carried  to  its  final  analysis  the  question  of  formal  depreciation 
charges  to  operating  expenses  is  simply  a  question  of  what  constitutes  cost  of 
operation,  and  the  time  when  such  cost  shall  be  acknowledged  in  the  accounts. 
The  position  which  the  Interstate  Commerce  Commission's  system  of  accounts 
assumes  on  this  point  is  that  the  depletion  which  represents  an  investment 
through  the  use  of  that  asset  in  operation  creates  an  item  of  cost  of  opera- 
tion which  should  be  reflected  in  the  accounts  when  the  fact  of  such  depletion 
takes  place,  and  that  a  statement  of  net  revenue  made  without  including  this 
element  of  cost  in  operating  expenses  is  an  erroneous  statement." 

DEPRECIATION  RESERVE — The  depreciation  reserve  is  a  valuation  account  and 
on  the  balance  sheet  is  deducted  from  the  corresponding  asset.  But  where  the 
amount  accrued  is  grossly  excessive  or  deficient,  it  is  oftentimes  shown  on 
the  balance  sheet  under  the  heading  of  Reserves. 

Sometimes  a  single  depreciation  reserve  is  kept.  Where  the  depreciation 
provision  is  determined  on  a  scientific  basis  it  is  preferable  to  maintain  a 
series  of  depreciation  reserves  corresponding  to  the  classification  of  the 
assets  being  depreciated. 

The  elements  entering  into  a  depreciation  reserve  account  are  as  follows; 

DEPRECIATION  RESERVE  ACCOUNT 

DEBIT  WITH  CREDIT  WITH 

Extraordinary  renewals  or  periodical  Periodical  provision  for  accrued 

renewals  which  tend  to  increase  depreciation — contra  a  charge  to 

the  original  life  of  the  asset.  Operating  Expenses. 

(Ordinary  repairs  and  renewals  Scrap  value  of  asset  dismantled-- 

must  be  absorbed  in  the  operating  contra  a  charge  to  Scrap  Stock 

expenses  of  the  period  in  which  account. 

the  expenditure  is  incurred. ) 
Cost  value  of  asset  dismantled — 

contra  a  credit  to  corresponding 

property  account. 

Copyright,  1919,  The  Ronald  Press  Company 


II-5-15 

The  balance  of  the  account  represents  accrued  depreciation  not  made  good. 

AMOUNT  OF  DEPRECIATION  TO  BE  ACCUMULATED — In  this  connection  the  following 
extract  from  Mr.  Dickinson's  paper,  "Profits  of  a  Corporation,"  may  be  of 
interest: 

"It  would  be  beyond  the  scope  of  this  paper  to  discuss  what  the  different 
rates  of  depreciation  on  different  classes  of  property  should  be,  but  it  is 
necessary  to  emphasize  the  fact  that  however  long  the  life  of  the  buildings 
or  plant ,  and  however  much  may  be  spent  year  by  year  in  the  actual  upkeep 
thereof,  there  must  be  a  gradual  depreciation  in  value,  due  either  to  direct 
wear  and  tear  or  to  the  necessity  of  replacing  old  and  obsolete  articles  by 
new  and  up-to-date  ones.   It  is  probable,  however,  that  in  any  going  concern 
which  is  maintained  in  an  efficient  condition  there  is  a  limit  to  the  total 
amount  of  this  depreciation  as  between  original  cost  and  present  value  ;  in 
fact,  the  theory  that  any  piece  of  machinery  or  any  building  continues  in  use 
until  it  reaches  an  absolute  scrap  value  is  not  in  accord  with  practical 
experience,  taking  any  plant  as  a  whole.   When  the  plant  is  entirely  new  it 
may  properly  be  considered  as  being  worth  its  cost.   It  will  never  again 
attain  this  standard,  because  never  again  will  the  whole  of  it  be  absolutely 
new;  on  the  other  hand,  it  can  never  fall  below  a  certain  percentage  of  this 
standard  without  becoming  so  inefficient  that  it  could  not  be  operated  at  all. 

"Between  these  limits,  therefore,  would  seem  to  lie  the  total  amount  of 
depreciation  to  be  provided  out  of  earnings  over  a  long  period  of  years, 
assuming  that  all  renewal  expenditure  tending  to  increase  the  life  of  the 
plant  is  charged  against  the  depreciation  so  provided.  It  is  submitted  that 
perhaps  the  most  satisfactory  way  of  making  such  provision  is  in  the  first 
instance  to  estimate  the  life  of  the  different  assets,  assuming  that  ordinary 
recurring  maintenance  and  renewal  charges  are  provided  out  of  profits  as  they 
occur,  and  to  set  aside  each  year  the  corresponding  proportion  of  the  original 
cost,  crediting  the  same  to  a  depreciation  fund.   From  time  to  time  expenditures 
which  may  be  termed  'extraordinary  renewals'  or  'periodical  renewals'  will 
require  to  be  made,  which  from  their  nature  increase  the  original  life  of  the 
plant.   These  should  be  charged  against  the  fund  provided.   In  this  manner 
an  equitable  charge  would  be  made  against  earnings  each  year  to. represent  the 
amount  of  wear  and  tear  that  has  accrued  during  the  year. 

"In  many  cases,  in  place  of  a  basis  of  life  in  years,  one  in  tons  operated 
will  be  found  preferable,  in  which  case  the  charge  against  profits  would  take 
the  form  of  a  rate  per  ton  of  production  rather  than  a  rate  per  year  of  life. 
There  are  other  methods  in  force  for  properly  providing  for  this  wear  and 
tear  but  there  is  one  method  which  it  may  safely  be  stated  is  an  entirely 
erroneous  one,  and  that  is  to  set  aside  such  sums  as  the  directors  may  decide 
upon  out  of  the  profits  of  each  year  upon  no  definite  basis  whatever.  ,  A 
decision  as  to  the  period  at  which  the  necessary  charge  should  be  made  against 
profits  must  be  admitted  to  be  largely  within  the  discretion  of  the  managers, 
for  the  reason  that  they  have  to  consider  not  only  sound  principles  of  ac- 
counting, but  also  policy;  but  it  is  not  inconsistent  with  this  proposition, 
and  is  certainly  more  scientific,  to  adopt  a  sound  and  conservative  basis  in 
the  first  instance  and  create  in  the  books  a  subsidiary  suspense  account  of 
the  proper  amount  each  year  which  would  be  discharged  by  appropriations  made 
from  time  to  time  out  of  surplus  profits.   Such  a  course  is  however,  at  best. 

Copyright,  1919,  The  Ronald  Press  Company 


II-5-16 

a  makeshift  and  it  is  the  duty  of  all  Accountants,  though  they  cannot  compel, 
at  least  to  urge,  corporations  to  make  adequate  provision  for  depreciation 
each  year." 

REFERENCES: 

Nicholson  and  Rohrbach,  Chapter  X 
Kester,  Vol.  II,  Chapters  VIII  to  XI 
Leake,  pages  67-135 


Copyright,  1919,  The  Ronald  Press  Company 


II-6-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  6 
ANALYSIS  OF  PROFITS 


Problem  14 

The  following  trial  balances  have  been  abstracted  from  the  books  of  the 
firm  of  F  and  G  at  the  close  of  business  on  December  31,  1918,  and  June  30, 
1919,  respectively^ 


F — Capital  Account 

G —   "       " 

F — Drawing  Account 

G —   "  " 

Real  Estate  and  Buildings 

Tool  Equipment 

Machinery  and  Other 

Equipment 
Customers'  Accounts 
Raw  Materials  on  Hand, 

July  1,  1918 
Notes  Receivable 
Cash 

Accounts  Payable 
Bills  Payable 
Wages 

Raw  Materials  Purchased 
Taxes 

Heat  and  Power 
Factory  Expense 
Salesmen's  Salaries  and 

Traveling  Expenses 
Insurance  Premiums 
Office  Expenses 
General  Traveling  Expenses 
Interest  (net) 
Sales  (less  Returns  and 

Allowances 
Kents  Collected  and  Other 

Miscellaneous  Income 

(less  sundry  deductions) 


DECEMBER  31,  1918 


f  900.00 
1,100.00 

30,913.27 
1,507.04 

12,091.07 
39,027.09 

9,027.03 

345.01 

11,987.05 


9,988.91 
9,183.91 

341.55 
1,403.27 

818.17 

3,981.93 
451.05 
783.45 
905.40 
984.50 


$  23,983.27 
17,093.27 


26,098.18 
7,500.00 


59,276.05 


1,788.93 


JUNE  30,  1919 


;  1,800.00 
1,700.00 

30,083.27 
1,903.23 

19,093.09 
51,027.03 

9,027.03 

4,705.27 

12,403.24 


18,946.25 

21,566.00 

788.44 

2,904.83 

1,904.32 

7,118.92 

782.03 

1,604.32 

1,107.35 

709.82 


$  23,983.27 
17,093.27 


17,091.07 
9,000.00 


120,599.75 


1,407.08 


1^135,739.70    $135,739.70  $189,174.44  $189,174.44 


Copyright,  1919,  The  Ronald  Press  Company 


II-6-2 

The  firm  commenced  operations  on  July  1,  1918;  and  the  books  were  properly 
opened  on  that  date.   The  books  were  not  closed,  however,  on  December  31, 
1918,  and  the  partners  are  particularly  anxious  to  be  informed  of  the  results 
from  operation  for  the  first  six  months  of  the  partnership.   From  the  best 
information  available  at  the  latter  date  the  following  items  should  be  taken 
into  account  in  arriving  at  the  financial  situation  at  December  31,  1918,  and 
the  profits  for  the  six  months  ending  on  that  date; 

1.  Inventory  of — Raw  Materials  $  989.11 

Finished  Products  1,575.83 

2.  Accrued  Interest  on — Bills  Receivable  78.98 

Bills  Payable  175.84 

3.  According  to  the  partnership  agreement  each 

partner's  capital  account  should  be  credited 
with  interest  at  6%  per  annum,  computed 
semiannually  on  the  balance  at  the  beginning 
of  each  six  months'  period, 

4.  Profits  or  losses  to  be  shared  equally  by 

the  partners. 

So  far  as  the  accounts  for  the  six  months  ending  June  30,  1919,  are  con- 
cerned, it  will  be  necessary  to  take  the  following  items  into  consideration: 

1.  Inventory  of — Raw  Materials  $1,108.37 

Finished  Products  1,835.07 

2.  Accrued  Interest  on — Bills  Receivable  135.34 

Bills  Payable  184.07 

3.  The  stipulation  in  the  partnership  agreement 

with  respect  to  interest  on  the  partner's 
capital  accounts  and  the  division  of  Profits 
and  Losses. 

With  the  foregoing  information  before  you  prepare: 

(a)  Comparative  statement  of  profits  and  income  for  each  of  the  two 

six-month  periods  above  referred  to, 

(b)  Balance  sheet  at  June  30,  1919, 

(c)  Statement  of  causes  of  increases  and  decreases  in  profit  and  loss 

accounts  of  December  31,  1918,  and  June  30,  1919. 


MISCELLANEOUS  QUESTIONS 

Question  26 — In  connection  with  corporation  accounting  the  following  terms 
are  used.  What  is  your  understanding  of  them? 

(a)  Fixed  charges 

(b)  Replacement  expenditures 

(c)  Maintenance  expenditures 

Question  27 — What  are  capital  assets?  At  a  meeting  of  shareholders  of  a 
company,  you,  as  auditor,  are  asked  to  explain  why  you  have  signed  the  Balance 
Sheet  in  which  the  capital  assets  appear  at  amounts  in  excess  of  what  they 
would  realize  if  sold.  What  would  be  the  nature  of  your  reply? 

Copyright,  1919,  The  Ronald  Press  Company 


II-6-3 

Question  28— How  should  the  following  expenditures  be  distributed  in  the 
accounts  of  a  manufacturing  company? 

(a)  Additions  and  extensions  to  property,  $98,102.15 

(b)  Extraordinary  repairs  and  renewals  (assuming  that  adequate  pro- 

vision has  been  made  for  depreciation),  $18,027,11 

(c)  Ordinary  repairs  and  renewals,  $27,081.33 

(d)  Replacement  of  certain  equipment  (estimated  original  cost, 

$81,047.27;  salvage  recovered,  $9,818.28),  $125,091.27 

Question  29 — Formulate  the  entries  ir.  respect  to  the  following: 

(a)  Cost  value,  $101,000,  of  certain  buildings  torn  down  during  the 

year  and  replaced  by  other  buildings  costing  $175,000.   The 
value  of  the  salvage  recovered  from  the  old  buildings  amounted 
to  $10,000. 

(b)  Heavy  repairs  and  extraordinary  renewals  of  machine  shops  equip- 

ment, tending  to  prolong  the  life  of  the  equipment,  $31,093.87. 

Question  30 — How  should  the  following  items  be  distributed  in  the  books 
of  a  manufacturing  company? 

(a)  Expenditures  of  $11,383.11  in  repair  and  renewal  of  soap-making 

machinery  and  equipment.   The  original  cost  of  the  machinery 
repaired  and  renewed  was  $65,000. 

(b)  Advance 'Of  $5,000  (first  six  months'  salary)  to  John  Smith,  who 

had  just  been  appointed  manager  of  one  of  the  principal 
European  offices. 

(c)  Expenditure  of  $25,000  in  improving  machine  shop  equipment  for 

the  purpose  of  reducing  the  cost  of  production. 


Copyright,  1919,  The  Ronald  Press  Company 


II-6-4 

Solutioii  to  Problem  10 


Book  Value 

$  50,186.45 

500.00 

116,003.00 


THE  MILLER  MOTOR  CAR  COMPANY 

STATEMENT  OF  AFFAIRS 

JULY  6,  1918 

ASSETS 


CURRENT  ASSETS: 
Cash 

Petty  Cash  Fund 
Notes  Receivable: 

Good 

Doubtful  (30%) 

Bad 


$  25,000.00 
50,000.00 
41,003.00 

$116,003.00 


Expected 
to  Realize 

$  50,186.45 
500.00 

25,000.00 
15,000.00 


315.92 
100,690.65 


82,486.63 


5350,182.63 


$  2,000.00 

766.66 

100.00 

2,000.00 

$  4,866.66 


Accrued  Interest  on  Notes  Receivable 
Accounts  Receivable: 

Good 

Doubtful  (50%) 

Bad 


LESS — Reserve  for  Bad  Debts  and 
Discounts 


$  30,000.00 
30,000.00 
44,013.40 

$104,013.40 

3,322.75 

$100,690.65 


Inventories  (destroyed  by  fire) — salvage 
estimated  at 


DEFERRED  CHARGES: 
Advances  to  Salesmen 
Unexpired  Insurance 
Rent  Paid  in  Advance 
Discount  on  Stock 


212.50 

30,000.00 
15,000.00 


10,000.00 


$145,898.95 


Copyright,  1919,  The  Ronald  Press  Company 


II-6-5 


CAPITAL  ASSETS: 

$  69,800.00    Buildings  %   69,800.00 

163,390.14    Machinery  and  Equipment  163,390.14 

1,706.24    Delivery  Equipment  1,706.24 

2,027.52    Fixtures  2,027.52 


Total  Property  Assets  Destroyed  by  Fire  $236,880.14 


Salvage  $  30,000.00 

Fire  Insurance  Carried  100,000.00 

40,000.00  Land  45,000.00 


$175,000.00 
DEDUCT — Due  Bondholders  (per  contra)  229,825.00 


66,000.00  Good-will 
200,000.00  Investment  in  Durant  Truck  Company  100,000.00 


$542,923.90 


$897,973.21  Total  All  Assets  $245,898.95 

DEDUCT — Estimated  Expense  of  Realiza- 
tion and  Liquidation  $12,500.00 
Preferred  Creditors — per  contra         43,944.89      56,444.89 


Net  Free  Assets  $189,454.06 


Surplus  of  Net  Free  Assets  over  Unsecured  Claims  car- 
ried down  $  74,484.94 
Deficiency  to  7%  Preferred  Stock  Issued  25,515.06 
Deficiency  to  Common  Stock  Issued  and  Outstanding  464,259.20 


$897,973.21  $564,259.20 


Copyright,  1919,  The  Ronald  Press  Company 


II-6-6 


Gross 
Liabilities 
$  41,649.55 
2,295.34 


150,000.00 

75,000.00 

4,625.00 


LIABILITIES 

PREFERRED  CREDIT0.RS; 

Wages  $  41,649.55 

Taxes  2,295.34 

Deducted  (per  contra)  $  43,944.89 

PARTLY  SECURED  OREDI TORS: 

5%  First  Mortgage  Bonds  $150,000.00 

6%  First  Mortgage  Bonds  75,000.00 

Accrued  Bond  Interest  to  June  30,  1918   4,625.00 
Bond  Interest  Accrued  from  June  30, 

1918,  to  July  6,  1918  200.00 


DEDUCT — Due  from  Insurance  Company- 
Salvage 
Land 

Total — per  contra 


Expected 
to  Rank 


$229,825.00 

$100,000.00 
30,000.00 
45,000.00 

$175,000.00   $  54,825.00 


UNSECURED  CREDITORS: 
60,144.12    Audited  Vouchers 


Total  All  Liabilities 

Surplus  of  Net  Free  Assets  over  Unsecured  Claims 


60,144.12 

$114,969.12 
74,484.94 

$189,454.06 


$100,000.00 

433,900.00 

30,359.20 

$897,973.21 


7%  Preferred  Stock 

Common  Stock  Issued  and  Outstanding 

Surplus 


$100,000.00 

433,900.00 

30,359.20 

$564,259.20 


Copyright,  1919,  The  Ronald  Press  Company 


II-6-7 


DEFICIENCY  ACCOUNT 


Estimated  Loss  in  value  of  Assets  on 
Realization: 

Notes  Receiv- 
able 

Accrued  In- 
terest on 
Notes  Rec. 

Accounts  Re- 
ceivable 

Advances  to 
Salesmen 

Rent  Paid 
in  Advance 

Discount  on 
Stock 

Good-will 

Investment 

Fire  Loss: 
Inventories 
Buildings 
Machinery  & 

Equipment 
Delivery 

Equipment 
Fixtures 
Unexpired 

Insurance 


$76,003.00 

103.42 

55,690.65 

2,000.00 

100.00 

2,000.00 
66,000.00 
100,000.00  §301,897.-07 


Appreciation  in  Value  of  Land  $  5,000.00 
7^  Preferred 

Stock       $100,000.00 
LESS— Sur- 
plus to 
Creditors, 
as  per 
Statement 
of  Affairs   74,484.94   25,515. U6 


Common  Stock  Issued  and 

Outstanding 
Surplus  at  June  30,  1918 


433,900.00 
30,359.20 


$82,486.63 
69,800.00 

163,390.14 

1,706.24 
2,027.52 

766.66 


$320,177.19 
LESS — Insur- 
ance Re- 
covered and 
Salvage    $140,000.00  180,177.19 


Bond  Interest,  July  1  to  7      200.00 
Expenses  of  Realisation  & 
Liquidation  12,500.00 


$494,774.26 


$494,774.26 


Dividend  to  Preferred  Stockholders — approximately  74.48%. 


Copyright,  1919,  The  Ronald  Press  Company 


II-6-8 

Solution  to  Problem  11 

A  CORPORATION 

Organized  under  the  Laws  of 

THE  STATE  OF  ILLINOIS 

With  an  Authorized  Capital  Stock  of 

$2,000,000.00 

Divided  into  20,000  Shares,  Par  Value  $100.00  each 

(1) 
Subscriptions  $2,000,000.00 

To — Capital  Stock  $2,000,000.00 

To  record  subscriptions  to  authorized 

issue  as  per  subscription  list.  x 

(2) 
Cash  1,700,000.00 

To — Subscriptions  1,700,000.00 

Cash  received  in  payment  of  subscriptions 
as  per  detailed  list  on  file. 

(3) 
Real  Estate,  etc.,  300,000.00 

To — A — Vendor  Account  300,000.00 

To  record  property  received  in  payment  of 
subscriptions  as  per  bill  of  sale  dated 

See  also  resolution  of  Board 

of  Directors  adopted  (Minute 

Book  page  • . . . } 

(4) 

A — Vendor  Account  300,000.00 

To—Subscriptions  300,000.00 

Solution  to  Problem  12 

(1) 

Unissued  Common  Stock  $1,000,000.00 

Unissued  Preferred  Stock  1,000,000.00 

To — Common  Stock  Authorized  $1,000,000.00 

Preferred  Stock  Authorized  1,000,000.00 

To  record  authorized  increase  in  c  apital 
stock  as  per  resolution  of  the  board  of 
directors  held  on  ...... 

(2) 
Stock  Dividend  (to  be  carried  to  Surplus)   1,000,000.00 

To — Unissued  Common  Stock  1,000,000.00 

Dividend  of  50%  on  outstanding  capital 

stock  declared  by  board  on to 

s-tockholders  of  record ,  payable 


Copyright,  1919,  The  Ronald  Press  Company 


II-6-9 


(3) 

Cash  $800,000.00 

To — Unissued  Preferred  Stock  $800,000.00 

Sale  of  8,000  shares  at  par  to  common 
stockholders. 

(4) 

Cash  242,000.00 

To — Unissued  Preferred  Stock  200,000.00 

Premium  on  sale  of  Preferred  Stock  42,000,00 

Sale  of  2,000  shares  at  121. 


ANSVSnSRS  TO  QUESTIONS 

Answer  to  Question  16 — Deferred  charges  represent  a  part  or  the  whole  Of 
expenditures  incurred  in  one  period,  the  benefit  from  which  accrues  to  a  subse- 
quent period  and  hence  properly  can  be  carried  forward  at  the  close  of  the  period 
in  which  the  expenditure  was  made  as  a  deferred  charge  against  future  opera- 
tions.  By  the  use  of  deferred  charge  accounts  prepaid  expenditures  can  be 
properly  allocated  to  the  period  to  which  they  relate. 

The  following  items  among  others  are  regarded  as  deferred  charges: 

1.  Prepaid  interest  or  discount  on  bills  payable 

2.  Organization  expenses 

3.  Insurance  premiums  prepaid. 

4.  Rent  paid  in  advance 

5.  Stripping  and  development  expenditures 

If  the  deferred  charge  will  be  disposed  of  through  charges  to  operating 
expense  as  in  (3)  or  (4)  it  is  termed  a  Deferred  Charge  to  Operations.   If  it 
will  be  charged  direct  to  the  general  profit  and  loss  account  or  to  surplus  as 
in  (1)  or  (2)  it  is  termed  a  Deferred  Charge  to  Income. 

Answer  to  Question  17 — Notes  Receivable  Discounted  represent  notes  re- 
ceived from  customers,  etc.,  which  after  endorsement  have  been  sold  or  other- 
wise disposed  of  before  payment.   The  individual,  firm,  or  corporation  dis- 
counting the  note  is  usually  required  to  endorse  same  and  thus  guarantee  its 
payment  in  event  the  maker  should  fail  to  pay  the  note  at  maturity.  Until  the 
note  is  redeemed  by  the  msiker  it  is  a  contingent  liability  of  the  party  dis- 
counting the  note.   Contingent  liabilities  should  be  disclosed  on  the  face  of 
the  balance  sheet.   In  the  case  of  Notes  Receivable  Discounted  it  is  usually 
covered  in  a  foot  note  reading  thus: 


"Contingent  Liability  in  respect  of  Notes  Receivable  Discounted,  $- 


Another  method  is  to  deduct  the  Notes  Receivable  Discounted  from  the  gross 
notes  receivable,  extending  the  net  amount  in  the  current  asset  column. 

The  entries  required  to  be  made  in  respect  of  Notes  Receivable  Discounted 
are  as  follows: 

Copyright,  1919,  The  Ronald  Press  Company 


II-6-10 

(1) 

Cash  $ 

Discount  Prepaid  

To — Notes  Receivable  Discounted  

For  amount  of  notes  discounted. 

C2) 

Notes  Receivable  Discounted  , 

To — Notes  Receivable  

For  amount  of  notes  taken  up  by  the  makers  on 
maturity. 

In  the  event  the  notes  are  not  taken  up  on  maturity  the  following  entry 
would  be  made: 


Notes  Receivable  Discounted  $ 

(Party  from  whom  received) 

To — Cash  $ 

For  payment  in  respect  of  notes  previously 
discounted  and  not  taken  upon  maturity 
by  maker. 

Answer  to  Question  18 — 

(a)  Provision  or  Reserve  for  Bad  and  Doubtful  Accounts  is  an  amount  set 
aside  out  of  profits  to  provide  for  the  estimated  loss  on  the  realization  of  ac- 
counts and  notes  receivable  at  any  given  date.   The  transactions  that  would 
ordinarily  enter  into  such  an  account  are  set  out  in  the  following  illlustration: 

RESERVE  FOR  BAD  AND  DOUBTFUL  ACCOUNTS 

DEBITED  WITH  CREDITED  WITH 

Total  amount  of  bad  debts  written  Total  provision  for  bad  and  doubtful 

off — contra  a  credit  to  the  Custom-  accounts  during  the  period — contra 

ers*  Accounts  carried  either  in  the  a  debit  to  Bad  and  Doubtful  Accounts 

customers*  ledger  or  in  the  sus-  (profit  and  loss  account), 

pense  ledger  to  which  it  had  been  Recoveries  on  account  of  bad  debts 

temporarily  transferred  pending  the  previously  written  off  as  irrecover- 

final  disposition  of  the  account.  able. 

The  balance  of  the  account  is  the  reserve  for  bad  and  doubtful  accounts  at  the 
end  of  the  period,  or  the  estimated  loss  on  the  realization  of  the  uncollected 
accounts  and  notes  receivable  at  that  date. 

(b)  Accrued  taxes  represent  the  amount  of  taxes  accrued  but  not  due  at  a 
certain  date.   The  transactions  entering  into  such  an  account  are  shown  thus: 


Copyright,  1919,  The  Ronald  Press  Company 


II-8-11 


DEBIT  WITH 


ACCRUED  TAXES  ACCOUNT 
CREDIT  WITH 


Periodical  payments  in  respect  of 
personal  or  real  property,  fran- 
chise, income,  and  other  taxes 
levied  by  states,  counties,  muni- 
cipalities, or  the  federal  govern- 
ment— contra  a  credit  to  Audited 
Vouchers  or  Accounts  Payable, 

Net  debit  adjustment  in  respect  of 
excess  provision  for  taxes — contra 
a  credit  to  Taxes  Account  (profit 
and  loss  account). 


Provision  for  accrued  taxes  during 
the  period,  usually  based  in  the 
case  of  all  taxes  other  than  income 
tax,  on  those  paid  for  the  previous 
tax  year  or  period. 

Refunds  on  account  of  overpayment 
of  taxes. 

Net  credit  adjustment  in  respect 
of  short  provision  for  accrued 
taxes* 


The  balance  of  the  account  is  the  accrued  taxes  at  the  end  of  the  period. 

(c)  Accrued  Wages  represent  the  wages  accrued  from  the  date  of  the  last 
pay-roll  to  the  close  of  the  period.   The  following  is  an  illustration  of  the 
entries  recorded  in  an  Accrued  Wages  Account: 


DEBIT  WITH 


ACCRUED  WAGES  ACCOUNT 
CREDIT  WITH 


With  the  reversal  as  of  the 
first  of  the  next  month  of  the 
entry  referred  to  on  the  opposite 
side — contra  a  credit  to  Wages 
Account. 


Provision  for  accrued  wages  at  the 
end  of  a  period — contra  a  debit 
to  Wages  Account. 


As  regards  stating  the  various  items  in  a  balance  sheet,  they  should  be 
shown  as  follows: 

1.  Reserves  for  (a)  bad  and  doubtful  accounts,  (b)  discounts  to  be  allowed, 
and  (c)  freight  allowances  to  be  made,  should  be  deducted  from  the  accounts  re- 
ceivable in  order  to  state  the  asset  at  the  estimated  realizable  value. 

2.  Accrued  wages  and  taxes  should  be  included  among  the  current  liabilities 
and  shown  separately.  Another  method  of  stating  these  items  is  to  include  them 
under  a  separate  and  general  heading  of  "Accrued  Liabilities," 

Answer  to  Question  19 — Expenditures  in  connection  with  additions  and  ex- 
tensions to  property  made  with  the  object  of  increasing  the  earning  capacity 
of  the  plant  may  be  defined  as  capital  expenditures  and  can  therefore  be 
charged  against  the  capital  asset  accounts.  Expenditures  in  connection  with 
the  repair,  maintenance,  and  upkeep  of  a  property — or  what  are  also  termed 
ordinary  repair,  renewal,  and  replacement  charges,  and  which  do  not  result  in 
either  increased  capacity  or  saving  in  operating  expenses — are  chargeable 
against  the  period  in  which  the  expenditures  were  incurred. 

Answer  to  Question  20 — 

(a)  The  repair  expenditures  of  tJ8,110,17  in  connection  with  the  repair  of 
buildings,  machinery,  and  other  equipment  are  proper  charges  to  the  operating 


Copyright,  1919,  The  Ronald  Press  Company 


II-6-12 

expenses  of  the  year  in  which  the  work  was  undertaken.  All  expenditures  in  the 
nature  of  ordinary  repairs  and  renewals  must  be  met  out  of  the  income  of  the 
period  in  which  the  work  was  done. 

(b)  The  purchase  of  horses,  wagons,  and  stable  equipment  at  a  cost  of 
$11,000  is  a  proper  charge  against  the  Horses,  Wagons,  and  Stable  Equipment 
Account,  but  only  in  the  event  that  adequate  provision  is  made  in  respect  of  the 
depreciation  which  has  already  taken  place  on  existing  equipment.  The  amount 
of  the  depreciation  should  be  ascertained  and  proper  adjustment  made  between  the 
Surplus  Account  at  the  beginning  of  the  year  and  the  Profit  and  Loss  Account 
for  the  year. 


ANALYSIS  OF  PROFITS 

One  method  of  analyzing  financial  statements  is  by  comparison  with  financial 
statements  of  previous  periods.   In  many  cases  the  desired  results  may  be  se- 
cured by  comparison  with  the  next  preceding  period.   The  cause  of  changes  in 
sales,  cost  of  sales,  and  other  profit  and  loss  items  may  be  summarized  as  shown 
below.   Comparative  balance  sheets  are  the  basis  for  the  statement  of  applica- 
tion of  funds  which  is  described  in  Lecture  14. 


M  N  COMPANY 

COMPARISON  OF  STATEMENTS  OF  PROFIT  AND  LOSS 

YEARS  ENDING  DECEMBER  31,  1917,  AND  DECEMBER  31,  1918 


Particulars 


19  17 
Amount      °/ 


Net  Sales         $200,000,00  100.00 
Less — Cost  of  Sales  150,000.00  75.00 

Gross  Profits  from 


Sales 

Less — Selling  Ex- 
penses 

Genl.  &  Adm, 
Expenses 

Total  Expenses 

Net  Profits  from 

Operations 
Additional  Interest 

Received 


$  50.000.00  25.00 

$  12,000.00  6,00 

17,000.00  8.50 

$  29,000.00  14.50 

$  21,000.00  10.50 


5,000.00   1.50 
Surplus  Net  Profits  $  24,000.00  12.00 


19  18 

Amount      ^ 

$250,000.00  100.00 

180,000.00   72.00 

$  70.000.00  28.00 

$  16,000.00   6.40 

20.000.00   8.00 
$  56.000.00  14.40 

$  34,000.00  13.60 

1.200.00    .48 
$  55,200.00  14.08 


INCREASE  OR 
DECREASE* 
Amount     ^ 

$50,000.00  

50.000.00  *5.00 

$20.000.00  5.00 

$  4,000.00  0.40 

5.000.00  *0.50 
$  7.000.00  -0.10 


$13,000.00  3.10 

*1.800.00  *1.02 
$11,200.00  2.08 


Copyright,  1919,  The  Ronald  Press  Company 


II-6-13 

The  causes  of  increases  and  decreases  may  be  further  analyssed  by  deter- 
mining the  factors  affecting  gross  profit  and  setting  out  the  principal  items 
under  selling  and  general  and  administrative  expenses  which  have  changed  during 
the  year.   It  is  assumed  that  the  unit  selling  price  of  the  article  manufactured 
by  the  M  N  Company  has  remained  unchanged  and  that  economies  in  production 
have  been  effected.  We  may,  therefore,  summarize  as  follows: 

Increase  in  gross  profits  due  to  increases  in  sales 

(25.00%  of  550,000)  $12,500.00 

Increase  in  gross  profits  due  to  proportionate 

decrease  in  cost  of  sales  (3.00%  of  $250,000)        7,500.00 


Total  increase  in  gross  profits  $20,000.00 

Less — Increase  in  salesmen's  commissions 
proportionate  to  increase 
in  sales)  $2,500.00 

Increase  in  salesmen's  salaries  1,400.00 
Increase  in  officers'  salaries  2,400.00 
Increase  (net)  in  other  expenses     700.00     7,000.00 


Increase  in  net  profits  from  operation  $13,000.00 

Less — Decrease  in  interest  received,  due  to  increase 

in  use  of  trade  acceptances  1,800.00 


Increase  in  surplus  net  profits         $11,200.00 


The  method  shown  above  of  analyzing  gross  profits  is  a  useful  one  to  apply 
in  many  cases.  Where  the  increase  or  decrease  in  sales  is  caused  by  price 
changes,  further  analysis  may  be  desirable.  Thus,  in  the  above  illustration, 
assuming  that  2,500  units  were  sold  in  1917  and  3,200  units  in  1918,  the  average 
gross  profit  per  unit  in  1917  would  have  been  $20,  and  in  1918,  $21.87}^: 

Each  unit  (average)  1917      1918 

Sold  for  $80.00    $78,125 

Cost  60.00     56.250 


Yielded  Gross  Profit  of  $20.00    $21,875 


The  analysis  would  then  appear  as  follows: 

Increase  in  gross  profits  due  to  number  of  sales 

made  ($20  x  700)  $14,000.00 

Decrease  in  gross  profits  due  to  decrease  in  selling 

price  ($1,875  x  3,200)  6,000.00 


Increase  in  gross  profits  due  to  increase  in  sales    $  8,000.00 
Increase  in  gross  profits  due  to  proportionate 

decrease  in  cost  of  sales  ($3,75  x  3,200)        $12,000.00 


Total  increase  in  gross  profits  $20,000.00 

Copyright,  1919,  The  Ronald  Press  Company 


II-6-14 

Some  of  the  causes  of  increase  (or  decrease)  in  gross  profits  may  be  found 
in  the  following: 

1.  Increase  in  sales  volume  due  to 

(a)  Increased  turnover  (or  increased  rate  of  production),  or 

(b)  Same  turnover  with  larger  inventory  (or  same  rate  of  production 

with  greater  plant  facilities) 
2*  Increase  in  sales  price  per  unit  sold, 

3.  Decrease  in  cost  of  sales  due  to  definitely  ascertainable  causes. 

4,  Increase  in  cost  of  sales  the  ratio  of  which  to  sales  has  decreased. 

Where  the  output  cannot  be  department ized  by  units  sold,  the  ainalysis  of 
gross  profit  fluctuations  is  of  course  much  more  difficult  of  ascertainment  and 
cannot  be  set  out  in  summary  form. 


Copyright,  1919,  The  Ronald  Press  Company 


II-7-1 

COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  7 
RECEIVERSHIPS 


Problem  15 

A,  B,  £ind  C  were  in  partnership  on  the  terms  that  A  was  to  share  one-half,  and 
B  and  C  one-fourth  each,  of  the  profits  or  losses. 

On  date  of  the  dissolution  the  following  statement  of  the  assets  and  liabil- 
ities was  abstracted  from  the  books: 


ASSETS 
Sundry  Assets 

$40,000.00 

Partners' 
A 
B 
C 

Total 
Sundry  Cri 

Toti 

LIABILITIES 
Capital  Accounts: 
$10,000.00 
10,000.00 
6,000.00 

3ditors 

al  Liabilities 

$26,000.00 
14,000.00 

Total  Assets 

$40,000.00 

$40,000.00 

The  assets  realized  $34,000,  which  was  received  in  the  following  instalments: 
$14,000,  $10,000,  and  $10,000. 

How  would  you  apply  the  proceeds  from  the  realization  of  the  assets  as  and 
when  received?  Prepare  realization  and  liquidatjLon  account  and  entries  to  close 
books. 


Problem  16 

The  following  trial  balance  was  abstracted  from  the  books  of  Henry  Parker, 

Receiver  for  the  Ashton  Manufacturing  Company,  on  December  31,  1918  (date  of 
receivership,  July  1,  1917): 

Cash  $  5,650.00 

Accounts  Receivable  12,140.00 

Raw  Materials  Inventory,  December  31,  1918  38,400.00 
Finished  and  Partly  Finished  Goods, 

December  31,  1918  26,120.00 

Additions  to  Machinery  and  Equipment  10,000.00 

Factory  Expenses  (including  Labor)  198,450.00 

Materials  used  in  cost  of  sales  88,800.00 

General  and  Selling  Expenses  41,100.00 

Bond  Interest  Paid — Ashton  Manufacturing  Co.  3,000.00 

Copyright,  1919,  The  Ronald  Press  Company 


1 1-7-2 

Liabilities  Paid — Ashton  Manufacturing  Co.  $  1,875.00 

Receiver's  Expenses,  1918  7,880.00 

Ashton  Manufacturing  Co. — in  Receivership  $  3,415.00 

Accounts  Payable  30,800.00 

Accrued  Interest  on  Receiver's  Certificates  1,200.00 

Receiver's  Certificates  (forty  $1,000  notes  sold 

July  1,  1918,  at  90;  due  July  1,  1920  at  par;  in- 
terest at  6%)  36,000.00 
Sales,  1918                                                 358,000.00 
Reserve  for  Depreciation,  1917  4,000.00 


$433,415.00  $433,415.00 


On  the  same  date  a  trial  balance  of  the  Ashton  Manufacturing  Company's  gen- 
eral ledger  appeared  as  follows: 

Real  Estate  $  75,000.00 

Machinery  and  Equipment  70,000.00 

Bond  Interest  3,000.00 

Henry  Parker,  Receiver  $  1,460.00 

Reserve  for  Depreciation,  to  July  1,-1917  16,500.00 

Accounts  Payable  440.00 

First  Mortgage  Bonds  (due  July  1,  1917;  interest  6%)  50,000.00 

Accrued  Interest  on  above  1,500.00 

Reserve  for  Premium  on  Bonds  (bonds  to  be  redeemed 

at  110)  5,000.00 

Capital  Stock,  issued  and  outstanding  80,000.00 

Surplus,  balance  January  1,  1918  6,900.00 


$154,900.00  $154,900.00 


Depreciation  on  Buildings,  Machinery  and  Equipment  for  1918,  $9,000. 

Prepare  a  balance  sheet  and  a  statement  of  profit  and  loss  which  you  might 
expect  to  find  in  the  receiver's  report,  consolidating  the  items  on  the  re- 
ceiver's and  corporation's  books. 

Problem  17 

A  &  B  purchased  a  piece  of  property  for  $250,000,  subject  to  a  mortgage 
obligation  of  $150,000,  the  balance  of  the  purchase  price  being  paid  in  cash, 
which  was  advanced  by  A  &  B  in  equal  proportions.   In  addition  to  these  moneys, 
A  &  B  each  contributed  $2,500  as  working  capital  and  paid  out  of  that  sum  $3,000 
for  expenses  in  connection  with  the  acquisition  of  the  property. 

The  agreement  entered  into  between  A  &  B  provided  that  A  should  collect 
the  rents  and  transact  all  business  and  that  the  profits  should  be  divided  in 
the  proportion  of  two-thirds  to  A  and  one-third  to  B. 

The  property  was  sold  at  the  end  of  two  years  for  $310,000,  the  purchaser 
agreeing  to  assume  the  mortgage  of  $150,000  (above  referred  to)  and  paying  the 

Copyright,  1919,  The  Ronald  Press  Company 


II-7-3 

remainder  in  cash.  During  the  two  years  the  rents  and  profits  were  exactly 
sufficient  to  meet  the  interest  on  the  mortgage  obligations,  except  as  to  the 
item  of  $3,000  above  referred  to.   A  &  B  had  not  drawn  anything. 

State  how  the  proceeds  of  the  sale  and  the  bank  balance  should  be  appor- 
tioned between  A  &  B,  as  well  as  how  to  formulate  the  journal  entries  that  are 
required  to  give  expression  to  all  of  the  foregoing  transactions. 

MISCELLANEOUS  QUESTIONS 

Question  31 — Define  the  term  "perpetual  inventories."  Are  there  any 
advantages  in  keeping  inventories  in  this  way  and  what  steps  are  usually  taken 
to  verify  such  inventories? 

Question  32 — How  should  inventories  of  (a)  finished  products,  (b)  goods 
in  process  of  manufacture,  and  (c)  raw  materials,  be  valued  for  the  purposes 
of  a  balance  sheet  at  any  given  date? 

Question  33 — A  certain  manufacturing  concern  makes  tools  and  other  equip- 
ment for  use  in  its  own  plant  and  charges  the  same  to  the  Capital  Asset  Ac- 
counts at  the  market  value  (which  is  in  excess  of  cost)  and  credits  the  dif- 
ference between  the  market  and  the  cost  value  to  Profit  and  Loss  of  the  period  in 
which  the  tools  and  other  equipment  were  manufactured.   Have  you  any  criticism 
to  make  of  this  treatment  in  the  accounts? 

Question  34 — In  the  preparation  and  certification  of  a  balance  sheet  of  a 
certain  company  would  you  think  it  necessary  to  take  any  cognizemce  of  the 
following: 

(a)  Guaranty  of  the  faithful  performance  upon  the  part  of  another 

company  of  a  contract  calling  for  the  construction  of  a  plant  to 
cost  $150,000.  The  first  named  company  proposes  to  furnish  the 
bulk  of  the  steel  and  iron  material  required. 

(b)  Suit  brought  by  an  employee  for  $25,000  on  account  of  injuries 

sustained  while  in  the  employ  of  the  company.   It  is  the  opinion 
of  the  company's  attorneys  that  a  settlement  could  be  effected 
for  $10,000. 

Question  35— 

(a)  Contrast  the  leading  methods  of  providing  for  depreciation. 

(b)  If  a  company  refused  to  make  any  provision  for  depreciation,  in 

what  way,  if  any,  would  you  change  the  balance  sheet ;  statement 
of  profits  and  income? 


Copyright,  1919,  The  Ronald  Press  Company 


II-7-4 

Solution  to  Problem  13 

JOURNAL  ENTRIES 

(1) 
Reserves  for  Depreciation  of s 

Buildings  ; 

Machinery,  Tools,  and  Equipment 
Delivery  Equipment 
Office  and  Warehouse  Fixtures 
To — Buildings 

Machinery,  Tools,  and  Equipment 
Delivery  Equipment 
Office  and  Warehouse  Fixtures 
To  close  reserves  for  depreciation  accounts  on 
destruction  of  respective  assets  by  fire, 
July  1,  1918. 

(2) 
Pire  Loss 

To — Buildings 

Machinery,  Tools,  and  Equipment 
Delivery  Equipment 
Office  and  Warehouse  Fixtures 
Inventory  of  Automobiles 
Inventory  of  Finished  Parts 
Inventory  of  Work  in  Progress 
Inventory  of  Raw  Materials 
Inventory  of  Coal 

Inventory  of  Stationery  and  Printing 
Unexpired  Insurance 
To  transfer  book  value  of  assets  destroyed  by 
fire  to  Fire  Loss  Account. 


\     200.00 

2,213.36 

43.76 

17.48 


320,177.19 


Salvage 

Insurance  Companies 
To — Fire  Loss 
Insurance  Companies 
Salvage  from  property  assets 
Salvage  from  inventories 


(3) 


$100,000.00 
30,000.00 
10,000.00 

$140,000.00 


40,000.00 
100,000.00 


200.00 

2,213.36 

43.76 

17.48 


69,800.00 

163,390.14 

1,706.24 

2,027.52 

30,550.00 

18,463.72 

26,132.11 

3,740.80 

3,500.00 

100.00 

766.66 


140,000.00 


(4) 


Surplus 

To — Fire  Loss 
To  transfer  net  loss  to  Surplus. 


180,177.19 


180,177.19 


(5) 


Bond  Interest 

To — Bond  Interest  Accrued 
Interest  accrued  since  July  1. 


1,225.00 


1,225.00 


Copyright,  1919,  The  Ronald  Press  Company 


I 1-7-5 


Surplus 

To — Bond  Interest 
To  close  latter  account. 


(6) 


$  1,225.00 


$  1,225.00 


(7) 
Realization  and  Liquidation  Account 
To — Land 

Good-Will 

Customers*  Accounts 
Notes  Receivable 

Accrued  Interest  on  Notes  Receivable 
Discount  on  Stock 
Advances 

Rent  Paid  in  Advance 
Investment 
Salvage 

Insurance  Companies 
To  transfer  assets  to  Realization  and 
iiquidation  Account. 

(3) 
5%  First  Mortgage  Bonds 
6%  First  Mortgage  Bonds 
Audited  Vouchers 
Bond  Interest  Accrued 
Taxes  Accrued 
Pay-Roll  Accrued 

To — Realization  and  Liquidation  Account 
To  transfer  liabilities  to  be  liquidated  to 
Realization  and  Liquidation  Account. 

(9) 
Reserve  for  Bad  Debts 
Reserve  for  Discounts 

To — Realization  and  Liquidation  account 
To  transfer  reserve  for  bad  debts  and  dis- 
counts to  Realization  and  Liquidation 
Account. 

(10) 
Cash 

To — Realization  and  Liquidation  Account 
Assets  realized  as  follows: 
Notes  Receivable  and  accrued 

Interest  $  52,253.25 

Accounts  Receivable  49,480.22 

Land  44,100.00 

Investment  100,000.00 

Salvage  40,000.00 

Insurance  Companies         100,000.00 


670,431.32 


150,000.00 

75,000.00 

60,144.12 

5,850.00 

2,295.34 

41,649.55 


1,522.75 
1,800.00 


385,833.47 


40,000.00 

66,000.00 

104,013.40 

116,003.00 

315.92 

2,000.00 

2,000.00 

100.00 

200,000.00 

40,000.00 

100,000.00 


334,939.01 


3,322.75 


385,833.47 


Copyright,  1919,  The  Ronald  Press  Company 


II-7-6 


(11) 
Realization  and  Liquidation  Account 
To — Cash 
Liabilities  paid  as  follows: 

5%  First  Mortgage  Bonds  $150,000.00 
6%  First  Mortgage  Bonds  75,000.00 
Audited  Vouchers  60,144.12 

Bond  Interest  Accrued  5,850.00 
Taxes  Accrued  2,295.34 

Pay-roll  Accrued  41,649.55 


$334,939.01 


$334,939.01 


(12) 

Realization  and  Liquidation  Account 
To — Cash 
Expenses  of  liquidation. 

(13) 
Surplus 

To — Realization  and  Liquidation 
Loss  on  liquidation. 

(14) 
7%  Preferred  Stock 
To — Cash 
Final  dividends  of  91.73  to  7%  preferred 
stock. 


Common  Stock 

To — Unissued  Stock 
To  close  latter  account. 


(15) 


(16) 


Common  Stock 
7%  Preferred  Stock 
To — Surplus 
To  close  accounts  on  surrender  of  stock 
certificates  for  cancellation. 


9,842.78 


291,118.88 


91,738.13 


66,100.00 


433,900.00 
8,261.87 


9,842.78 


291,118.88 


91,738.13 


66,100.00 


442,161.87 


CASH  ACCOUNT 


Balance 

Insurance 

Rotes  Receivable  and  Accrued 

Interest 
Accounts  Receivable 
Land 
Salvage 
Investment 


$  50,686.45 
100,000.00 

52,253.25 
49,480.22 
44,100.00 
40,000.00 
100,000.00 

$436,519.92 


Wages  and  Taxes 
Bonds  and  Accrued  Interest 
Audited  Vouchers 
Expenses 

Dividend  7%,  Preferred 
Stockholders 


$  43,944.89 

230,850.00 

60,144.12 

9,842,78 

91,738.13 


$436,519.92 


Copyright,  1919,  The  Ronald  Press  Company 


Solution  to  Problem  13 


II-7-7 


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Copyright,  1919,  The  Ronald  Press  Company 


II-7-8 

ANSWERS  TO  QUESTIONS 
Answer  to  Question  21— 

(a)  OPENING  ENTRIES  are  those  entries  required  to  be  made  at  the  inception 
of  an  enterprise  and  usually  to  record  the  amount  and  nature  of  the  capital  in- 
vestment, e.g.,  single  proprietor's  or  partner's  capital  contribution,  or 
capital  stock  in  the  case  of  a  corporation,  and  on  the  other  hand  the  property 
and  other  assets  acquired  to  enable  the  enterprise  to  commence  operations, 

(b)  CLOSING  ENTRIES  are  those  entries  required  to  be  made  at  the  close  of 

a  given  period  to  transfer  the  balances  in  the  various  nominal  or  profit  and  loss 
accounts  to  the  manufacturing,  trading,  or  profit  and  loss  accounts  as  the  case 
may  be.  After  the  closing  entries  have  been  made  the  balances  in  the  various 
accounts  represent  the  capital  and  current  assets,  deferred  charges,  capital 
and  current  liabilities,  including  the  baleince  of  the  Surplus  Account  in  the 
case  of  a  corporation. 

The  term  is  also  applied  to  the  entries  required  to  close  the  books  of  a 
single-proprietorship,  co-partnership,  or  corporation  on  the  liquidation  of  the 
business  by  sale  or  otherwise. 

(c)  ADJUSTING  ENTRIES  are  entries  that  must  be  made  in  order  that  the  ac- 
counts prepared  at  any  given  date  may  be  correctly  stated  and  usually  are* 
rendered  necessary  because  of  the  failure  to  take  up  all  of  the  income  and 
expenditure  relating  to  a  given  period  and  therefore  are  really  an  adjustment 
of  the  results  between  periods;  for  instance,  taking  up  accrued  interest,  set- 
ting up  inventory  reserve,  etc. 

Answer  to  Question  22 — 

(a)  ACCRUED  INTEREST  on  BILLS  RECEIVABLE  represents  the  interest  earned  on 
bills  receivable  but  not  due  at  ^  given  date.   The  interest  may  be  "inven- 
toried" or  handled  on  the  "accrual"  basis. 

1.  Open  an  account  entitled: 

ACCRUED  INTEREST  ON  BILLS  RECEIVABLE 

DEBIT  WITH  CREDIT  WITH 

Total  amount  of  interest  on  bills  re-  Interest  received  on  bills  receiv- 
ceivable  accruing  during  the  current  able — contra  a  debit  to  Cash  Ac- 
month — contra  a  credit  to  Interest  count. 
Earned,  Profit  and  Loss  Account. 

The  balance  of  the  account  represents  the  accrued  interest  en  bills  receivable, 
and  is  shown  as  a  current  asset  on  the  balance  sheet. 

2.  Open  an  account  entitled: 


Copyright,  1919,  The  Ronald  Press  Company 


II-7-9 

INTEREST  RECEIVED 
DEBIT  WITH  CREDIT  WITH 

Accrued  interest  on  bills  receivable    Interest  Received  on  bills  receiv- 
at  beginning  of  period — contra  a       able  during  period — contra  a  debit 
credit  to  Accrued  Interest  on  Bills      to  Cash  Account. 

Receivable  (asset  account).  Accrued  Interest  on  bills  receivable 

at  the  end  of  period — contra  a  debit 
to  Accrued  Interest  on  Bills  Re- 
ceivable (asset  account). 

The  balance  of  the  account  represents  the  net  interest  earned  during  the  period 
and  is  transferred  to  the  credit  of  the  Profit  and  Loss  Account. 

ACCRUED  INTEREST  on  BILLS  PAYABLE  represents  interest  accrued  but  not  due 
at  a  given  date.   If  the  interest  is  matured  but  unpaid,  it  should  be  styled 
"Matured  Interest  on  Bills  Payable  Unpaid."  Accrued  interest  may  be  handled  in 
one  of  two  ways : 

1.  Open  an  account  entitled: 

ACCRUED  INTEREST  ON  BILLS  PAYABLE 
(Liability  account) 
DEBIT  WITH  CREDIT  WITH 

Total  payments  of  interest  on  bills  Total  amount  of  interest  on  bills  pay- 
payable  during  period — contra  a  able  accruing  during  current  month 
credit  to  Cash,  —contra  a  charge  to  Interest  Paid 

(profit  and  loss  account). 

The  balance  of  the  account  represents  unpaid  accrued  interest  on  bills  pay- 
able and  would  be  shown  as  a  current  liability  on  the  balance  sheet. 

2*  Or  pass  the  accrued  interest  through  the  Interest  Paid  Account  as 
follows: 

INTEREST  PAID 
(Profit  and  loss  account) 
DEBIT  WITH  CREDIT  WITH 

Interest  paid  during  period.  Interest  accrued  but  unpaid  at  be- 

Interest  accrued  but  unpaid  at  end  of      ginning  of  period — contra  a  debit 
period — contra  a  credit  to  Accrued      to  Accrued  Interest  on  Bills  Pay- 
Interest  on  Bills  Payable  Account.       able  Account. 

The  balance  of  the  account  represents  the  net  interest  charge  for  the  current 
period  and  is  transferred  to  the  debit  of  the  Profit  and  Loss  Account. 

(b)  INSURANCE  UNEXPIRED  represents  the  unearned  insurance  premiums  or  the 
insurance  unexpired  at  any  given  date,  being  an  expenditure  incurred  in  one 
period  which  applies  to  that  and  subsequent  periods  and  properly  should  be 
carried  forward  in  order  that  the  expense  of  carrying  insurance  may  be  equitably 
distributed  over  the  term  of  the  policy.  The  transactions  that  would  enter  into 
the  Insurance  Unexpired  Account  are  shown  below: 


Copyright,  1919,  The  Ronald  Press  Company 


II-7-10 

(1) 

INSURANCE  UNEXPIRED  ACCOUNT 
DEBIT  WITH  CREDIT  WITH 

Insurance  unexpired,  or  unearned  in-    Cost  of  carrying  insurance  during  the 
surance  premiums  at  the  beginning      period  or  the  earned  insurance 
of  the  period.  premiums — contra  a  debit  to  In- 

Insurance  premiums  paid  or  credited       surance  Premium  Account  (profit 
during  l;he  period — contra  a  credit      and  loss  account), 
to  Cash  or  Accounts  Payable.  Return  premiums  on  policies  can- 

celled during  the  period. 

The  balance  of  the  account,  insurance  unexpired,  or  unearned  insurance  pre- 
miums at  the  end  of  the  period,  would  appear  in  the  balance  sheet  as  a  deferred 
charge  to  operations. 

In  some  companies  the  insurance  premiums  are  handled  in  the  manner  illus- 
trated above,  although  in  the  smaller  enterprises  the  following  method  of  deal- 
ing with  the  insurance  premiums  is  generally  adopted; 

J  (2) 

INSURANCE  PREMIUMS  ACCOUNT 
(A  profit  and  loss  account,  except  at  the  end  of  the  period,  when 
the  insurance  unexpired,  or  unearned  insurance  premium,  is  re- 
corded in  the  account,  when  it  becomes  a  deferred  charge  to  oper- 
ations account) 
DEBIT  WITH  CREDIT  WITH 

Insurance  unexpired,  or  unearned  in-     Insurance  unexpired,  or  unearned  in- 
surance premiums,  at  the  beginning      surance  premiums,  at  the  end  of  the 
of  the  period,  being  the  amount        period. 

brought  down  from  the  previous       Return  premiums  on  policies  can- 
period,  celled  during  the  period. 
Insurance  premiums  paid  or  credited 
during  the  period — contra  a  credit 
to  Cash  or  Accounts  Payable. 

The  balance  of  the  account,  cost  of  carrying  insurance  during  the  period,  trans- 
ferred to  the  debit  of  the  Manufacturing,  Trading,  or  Profit  and  Loss  Accounts, 
as  the  case  may  be. 

(c)  RENTS  PAID  IN  ADVANCE  represents  the  unearned  rent  or  prepaid  rent  at 
any  given  date  ;  also  an  expenditure  incurred  in  one  period,  the  benefit  from 
which  accrues  to  a  succeeding  period.  An  illustration  of  the  transactions  en- 
tering into  such  an  account  is  given  below: 

RENTS  PAID  IN  ADVANCE  ACCOUNT 
(A  deferl'ed  charge  to  operations  account) 
DEBIT  WITH  CREDIT  WITH 

Rents  paid  in  advance  at  the  beginning    Rents  paid  in  advance  at  the  end  of  the 

of  the  period.  period. 

Rents  paid  during  the  period — contra 
a  credit  to  Cash  or  Accounts  Payable. 

Copyright,  1919,  The  Ronald  Press  Company 


II-7-11 

The  balance  of  the  account,  rental  charge  for  the  period,  transferred  to  the 
debit  of  the  Manufacturing,  Trading,  or  Profit  and  Loss  Accounts,  as  the  case 
may  be. 

Rents  paid  in  advance  can  also  be  handled  much  the  same  as  Insurance  Unex- 
pired Account  referred  to  in  (1). 

Answer  to  Question  23 — The  effect  on  the  balance  sheet  of  increasing  the 
reserve  for  depreciation  in  the  case  of  a  manufacturing  business  will  be  some- 
what as  follows: 

!•  The  book  value  of  the  capital  assets  will  be  decreased. 

2.  Profit  and  loss,  and  hence  surplus,  will  be  decreased  to  the  extent 
that  depreciation  charges  have  been  included  in  cost  of  sales, 

3«  Work  in  process  and  finished  stock  inventory  will  be  increased, 
owing  to  the  fact  that  the  large  increase  in  the  provision  for 
depreciation  will  make  necessary  a  raise  in  the  burden  rate,  thus 
.  affecting  all  goods  worked  on  during  the  period  whether  sold  or 
still  on  hand, 

4.  Working  capital  will  be  increased  by  that  proportion  of  the  addi- 
tional depreciation  apportionable  to  inventories  on  hand  December 
31,  1918. 

Answer  to  Question  24 — 

(a)  Unless  the  company  owns  a  controlling  interest  it  is  improper  to  take 
up  any  earnings  of  the  other  company  until  a  dividend  is  declared.  The  policies 
of  the  other  company  are  dictated  by  others  and  losses  may  subsequently  occur 
which  will  prevent  the  payment  of  a  dividend.   The  entry  made  anticipates  an 
unrealized  profit, 

(b)  A  resolution  of  the  board  of  directors  must  authorize  this  entry.   The 
general  manager  does  not  have  the  authority.  Writing  up  the  value  of  property 
assets  is  contrary  to  good  accounting  practice  except  when  financing  is  under- 
taken or  a  sale  is  to  be  made,  etc.  The  credit  should  be  to  capital  surplus 
rather  than  surplus,  since  the  profit  is  as  yet  unrealized. 

(c)  If  the  current  provision  was  excessive  by  this  amount,  the  entry  is 
correct.   In  this  case  future  provisions  should  be  made  on  the  new  basis.  To 
write  back  the  depreciation  merely  for  the  purpose  of  increasing  book  profits 
is  incorrect. 

Answer  to  Question  25 — The  following  draft  form  will  probably  meet  the  con- 
ditions set  out  in  the  question: 

CASH  RECEIPTS 
DATE   ACCOUNT   PARTICULARS   FOLIO     SALES  LEDGERS  DISCOUNT   PRIVATE 

NO.  1   NO,  2   ON  SALES   LEDGER   BANK 

CASH  DISBURSEMENTS 

CHECK  AUDITED     PRIVATE 

DATE    ACCOUNT    PARTICULARS    NUMBER   FOLIO    VOUCHERS    LEDGER    BANK 

Copyright,  1919,  The  Ronald  Press  Company 


II-7-12 

The  essential  features  are  separate  columns  for  Sales  Ledger  No,  1,  Sales 
Ledger  No.  2,  and  Audited  Vouchers,  so  that  the  monthly  totals  may  be  obtained 
for  posting  purposes. 


RECEIVERSHIPS 

In  Lectures  1  and  3,  the  statement  of  affairs  and  the  realization  and 
liquidation  account  have  been  explained  as  being  those  prepared  immediately 
preceding  and  immediately  following  the  dissolution  of  a  business.  Or,  a  state- 
ment of  affairs  may  be  utilized  to  portray  the  condition  of  a  business  on  a 
forced  sale  basis,  whether  actual  liquidation  is  contemplated  or  not.   It  re- 
mains now  to  consider  another  aspect  of  a  corporation's  records,  i.e.,  the 
accounts  kept  during  the  administration  of  a  receiver. 

It  sometimes  happens  that  a  debtor  will  assign  all  or  part  of  his  assets  to  a 
creditor,  or  other  assignee,  for  the  purpose  of  satisfying  certain  of  his  cred- 
itors. The  assignee  is  a  receiver  in  equity  if  formal  application  'is  made 
through  a  court.  Insolvency  need  not  exist,  but  the  act  of  assignment  is  one  of 
bankruptcy. 

However,  if  all  the  creditors  are  agreed,  the  receiver  in  equity  may  con- 
tinue his  administration  of  the  business  for  an  indefinite  period  until  (a) 
the  creditors  are  satisfied,  (b)  bankruptcy  proceedings  are  initiated,  or  (c) 
reorganization  takes  place.   In  connection  with  the  accounts  kept  by  a  receiver, 
the  following  points  should  be  noted: 

1.  The  receiver  should  open  a  separate  set  of  books  containing: 

(a)  All  the  assets  of  the  business,  the  valuation  reserve  accounts,  and 

all  other  items  except  investment  and  liability  accounts  (accrued 
up  to  the  date  of  his  appointment)  which  have  been  assigned  to  him. 

(b)  Capital  asset  accounts  may  be  omitted  but  are  usually  transferred. 

It  is  desirable  but  not  essential  that  the  schedule  of  accounts  used  by  the 
receiver  should  be  the  same  as  that  of  the  business  taken  over,  in  order  that 
analyses  of  operations  under  his  administration  may  be  compared  with  operations 
before  his  appointment. 

2.  Accrued  assets  should  be  computed  as  of  the  day  of  the  receivership  and 
the  books  brought  up  to  date  before  transfer  is  made  charging  the  receiver  with 
the  assets  taken  over.  The  closing  entries  of  the  business  with  regard  to  the 
receiver's  account  should  agree  with  the  opening  entries  on  the  receiver's  books. 
The  corporation  will  charge  "A  B,  Receiver"  while  the  receiver  will  credit 

"C  Company,  in  receivership."  These  two  accounts  may  be  reconciled  in  much  the 
same  manner  as  home  office  and  branch  office  accounts. 

3.  The  receiver's  operations  will  be  strictly  separated  from  previous  trans- 
actions.  Liabilities  of  the  previous  administration  which  he  pays  will  be 
charged  to  an  account  properly  designated  or  directly  to  the  corporation's 
account.'  Preference  in  such  payment  will  be  made  as  described  under  the  state- 
ment of  realization  and  liquidation. 

Copyright,  1919,  The  Ronald  Press  Company 


II-7-13 

4.  As  a  rule,  all  current  items  of  expense  will  be  charged  to  expense 
accounts  in  the  usual  way,  without  similar  entries  being  made  on  the  books  of 
the  corporation.   However,  certain  items,  such  as  bond  interest,  are  obliga- 
tions not  incurred  by  the  receiver  and  will  be  accrued  on  the  corporation's 
books.  When  the  interest  is  paid,  accrued  interest  will  be  charged  and  the 
receiver's  account  credited.   On  the  receiver's  books,  cash  will  be  credited 
and  the  corporation's  account  or  "Interest,  AB  Co."  charged. 

5.  The  receiver's  books  should  be  closed  at  the  end  of  each  fiscal  or 
calendar  year  in  conformity  with  the  previous  practice  of  the  corporation. 

6.  Reports  which  receivers  submit  are  usually  prescribed  in  a  general  way, 
at  least,  by  the  court,  but  the  accountant  may,  in  addition,  add  to  the  report 
and  exhibits  such  other  information  which  in  his  opinion  are  essential  to  a 
proper  interpretation  of  the  receiver's  transactions.   The  exhibits  will 
include: 

(a)  Balance  sheet,  generally  combined  with  the  balance  sheet  of  the 

corporation  to  show  the  financial  condition  of  the  corporation 
in  receivership. 

(b)  Statement  of  profit  and  loss  during  the  receiver's  administration, 

together  with  combined  statement  of  receiver's  profit  and  loss 
and  corporation's  profit  and  loss  (if  any)  during  the  fiscal 
period  under  review. 

(c)  Detailed  schedules  supporting  (a)  and  (b)  where  necessary. 

(d)  Statement  of  application  of  funds  during  the  period  of  receiver's 

administration.   (For  the  construction  of  this  statement  see 
Lecture  12. ) 

(e)  A  statement  of  charge  and  discharge  similar  to  the  statement  pre- 

pared in  connection  with  estate  accounts  (Lecture  10)  instead 
of  (d). 

(f )  Occasionally,  a  summary  of  cash  receipts  and  disbursements. 

7.  The  receiver  terminates  his  accounts  according  to  the  method  of  disposing 
of  the  business  which  may  be  one  of  the  following: 

(a)  Initiation  of  bankruptcy  proceedings.   The  receiver  will  turn 

over  his  assets  to  the  receiver  in  bankruptcy  just  as  the  cor- 
poration turned  over  its  assets  to  the  receiver  in  equity.  The 
distinction  between  these  two  sorts  of  receiverships  should 
be  noted* 

(b)  Reorganization* 
(o)  Sale. 

8.  When  the  receivership  ends,  the  profits  of  the  receivership  should  be 
entered  on  the  corporation's  books  preliminary  to  closing  the  latter,  and  like- 
wise all  assets  and  liabilities  turned  back  by  the  receiver  should  be  entered  and 
his  account  closed. 

REFERENCES: 

H.  C.  Freeman,  Yearbook  American  Institute  of  Accountants,  1917, 

pages  83-104 
Bays,  Debtor  and  Creditor  and  Bankruptcy. 

Copyright,  1919,  The  Ronald  Press  Company 


II-8-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  8 
BRANCH  HOUSE  ACCOUNTING 


Problem  18 

The  American  Manufacturing  Co,  opened  a  branch  store  on  July  1,  1918, 
in  one  of  the  large  cities  with  A  as  manager.  From  that  date  to  June  30, 
1919,  the  following  transactions  took  place: 

1.  Merchandise  to  the  value  of  $11,083.77  was  shipped  during  the  year 

direct  from  the  warehouse  of  the  home  office. 

2.  Freight  charges  (prepaid  by  the  home  office)  thereon  amounted  to 

$911.03. 

3.  Uncollected  customers'  accounts  at  June  30,  1919,  amounted  to 

§3,911.33,  and  the  Accounts  Payable  (in  respect  of  salaries  and 
other  expenses)  to  $598.11. 

4.  Materials  to  the  value  of  $8,378.11  were  purchased  by  and  paid  for 

direct  by  the  branch. 

5.  The  total  sales  of  all  products  during  the  year  ended  June  30, 

1919,  amounted  to  $30,811.74. 

6.  Branch  expenses  paid  (including  salaries  of  salesmen  and  office 

clerks,  rent,  light,  advertising,  etc.,  but  exclusive  of  the 
unpaid  items  above  referred  to)  $6,987.45. 

7.  Charge  of  $675  rendered  by  the  home  office  in  respect  of  the 

proportion  of  management  salaries  and  expenses  chargeable  to 
the  branch  office. 

8.  Materials  to  the  value  of  $1,318.11  were  shipped  to  Branch  II  of 

the  company  (including  the  freight  charges  thereon  of  $98.11). 

9.  Inventory  of  materials  on  hand  June  30,  1919,  $1,103.27. 

A  separate  set  of  books  was  kept  at  the  branch  and  you  are  required  to 
prepare: 

(a)  The  necessary  entries  to  record  the  foregoing  transactions  on  both 

the  branch  and  home  office  books, 

(b)  The  necessary  closing  journal  entries  for  the  branch  books, 

(c)  The  necessary  entries  to  take  up  the  profit  or  loss  on  the  home 

office  books. 

(d)  The  necessary  statements  to  show  the  profits  or  losses  from 

trading,  and  a  summary  of  the  transactions  between  the  branch 
and  the  home  office. 


Copyright,  1919,  The  Ronald  Press  Company 


II-8-2 

Problem  19 

The  General  Manufacturing  Co.  asks  you  to  prepare  its  general  balance 
sheet  at  December  31,  1918.   Its  home  office  is  located  in  New  York.  It  has 
a  plant  in  Chicago  and  branches  in  San  Francisco,  New  Orleans,  and  Omaha,  each 
having  a  separate  set  of  books.  Following  are  the  trial  balances  at  December 
31,  1918,  after  closing. 

HOME  OFFICE 
TRIAL  BALANCE,  DECEMBER  31,  1918 

Cash  $   58,000.00 

Accou^ts  Receivable  294,300.00 

Inventories  773,200.00 

Other  Current  Assets  43,650.00 

Interest  Insurance  and  Taxes  Prepaid  12,590.00 

Bond  Discount  not  Amortized  2,500.00 

Stocks  of  Other  Companies  120,000.00 

Miscellaneous  Stocks  and  Bonds            •  12,250.00 

Liberty  Bonds  125,000.00 

Sinking  Fund  Investment  10,000.00 

Land  78,410.00 

Buildings  183,540.00 

Machinery  and  Equipment  65,450,00 

Office  Furniture  and  Fixtures  7,320.00 

Delivery  Equipment  5,425.00 

Construction  in  Progress  30,158.00 

Other  Fixed  Assets  16,380.00 

Good-will  350,000.00 

Current  Account — Plant  356,750.00 

Current  Accounts — Branches  135,800.00 

Depreciation  Reserve  $   97,700.00 

Notes  Payable  695,000.00 

Accounts  Payable  52,800.00 

Accrued  Interest,  Taxes,  and  Wages  5,380.00 

Other  Current  Liabilities  3,250.00 

Bonds  Issued  and  Outstanding  500,000.00 

Capital  Stock  1,000,000.00 

Contingent  Reserves  75,000.00 

Surplus  210,500.00 

Profit  and  Loss  66,093.00 

Dividends  Paid  S5,000.00 


$2,705,723.00  $2,705,723.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-8-3 


CHICAGO  PLANT 
TRIAL  BALANCE,  DECEMBER  31,  1918 


Cash 

Petty  Cash 

Trade  Accounts  Receivable 

Sundry  Accounts  Receivable 

Inventory  Merchandise 

Inventory  Supplies 

Sundry  Current  Assets 

Interest  Prepaid 

Insurance  Prepaid 

Miscellaneous  Prepaid  Charges 

Liberty  Bonds 

Buildings 

Machinery  and  Equipment 

Office  Furniture  and  Fixtures 

Delivery  Equipment 

Depreciation  Reserve 

Notes  Payable 

Trade  Accounts  Payable 

Sundry  Accounts  Payable 

Accrued  Interest 

Accrued  Wages 

Other  Current  Liabilities 

Home  Office  Account 


5  38,760.00 

950.00 

99,255.00 

23,490.00 

185,650.00 

•   4,375.00 

3,290.00 

3,600.00 

2,144.00 

630.00 

25,000.00 

38,400.00 

15,460.00 

1,190.00 

11,050.00 


$  18,480.00 

180,000.00 

13,819.00 

10,080.00 

1,160.00 

850.00 

1,300.00 

227,555.00 


:$453 ,  244 .  00  $453 ,  244 .  00 


BRANCH  HOUSES 
TRIAL  BALANCES,  DECEMBER  31,  1918 


NEW  ORLEANS  SAN  FRANCISCO   OMAHA 


Cash 

Petty  Cash 

Trade  Accounts  Receivable 

Sundry  Accounts  Receivable 

Inventory  Merchandise 

Inventory  Supplies 

Insurance  and  Miscellaneous  Prepayments 

Land 

Buildings 

Machinery  and  Equipment 

Office  Furniture  and  Equipment 

Delivery  Equipment 


\        575.00 

50.00 

10,360.00 

130.00 

11,095.00 

140.00 

175.00 

2,230.00 

10,025.00 

2,330.00 

765.00 

950.00 


$  2,191.00 

75.00 

17,468.00 

187.00 

18,380.00 

225.00 

195.00 

4,157.00 

16,320.00 

3,230.00 

316.00 

831.00 


$  1,914.00 
100.00 

15,686.00 
632.00 

10,144.00 
328.00 
310.00 


6,320.00 
375.00 
860.00 


$38,825.00   $63,575.00   $36,669.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-8-4 


Trade  Accounts  Payable 
Miscellaneous  Accounts  Payable 
Accrued  Taxes 
Accrued  Wages 
Depreciation  Reserve 
Home  Office  Account 


2,960.00   $  5,954.00   $  2,914.00 


336.00 

143.00 

260.00 

1,460.00 

33,666.00 


1,953.00 
783.00 
460.00 

2,130.00 


375.00 

176.00 
2,850.00 


52,295.00    30,354.00 


$38,825.00   $63,575.00   $36,669.00 


Upon  reconcilement  of  the  plant  and  branch  current  accounts  the  following 
items  were  iound  to  be  open: 

1.  Account  with  plant  at  Chicago: 

(a)  Charge  by  home  office  of  $100,000  cash  sent  to  plant  ;  not 

taken  up  by  plant 

(b)  Invoices  for  goods  shipped  to  plant,  for  which  plant  has 

not  given  credit,  aggregating  $29,195 

2.  Branch  house  current  accounts  : 

(a)  Charges  by  branches  against  customers  whose  accounts  are 

carried  at  the  home  office — no  credit  yet  given  by  home 
office — $8,400 

(b)  Invoices  for  goods  shipped  and  charged  to  branches — not 

credited  by  branches--aggregating  $11,085 

You  are  requested  to  prepare  a  balance  sheet  of  the  General  Manufacturing 
Co.  at  December  31,  1918,  having  due  regard  for  the  elimination  of  inter- 
office accounts. 

Prepare  in  connection  with  the  above  a  working  sheet  showing  how  the 
final  balance  sheet  totals  were  arrived  at. 


MISCELLANEOUS  QUESTIONS 

Question  36 — A  company  operating  a  niunber  of  departments  desires  to  know 
the  profit  on  sales  by  each  department.   How  would  you  suggest  that  the  books 
be  kept  in  order  that  the  desired  information  can  be  furnished  to  the 
management  ? 

Question  37 — How  should  the  followinfc  expenditures  be  distributed  in  the 
accounts  of  a  manufacturing  concern:  Payments  aggregating  $11,037.27  for 
real  estate,  personal  property,  and  corporation  taxes  for  the  year  1918 — 
monthly  provisions  have  been  made  for  the  accrued  taxes. 

Question  38 — What  is  the  difference  between  cash  dividends,  bonuses  to 
officers,  and  stock  dividends?  Formulate  the  entries  required  to  be  made  in 
dealing  with  each  item. 

Question  39 — How  should  preferred  stock  dividends  in  arrears  be  stated  in 
the  balance  sheet  of  a  company? 


Copyright,  1919,  The  Ronald  Press  Company 


II-8-5 

Question  40 — How  would  you  state  the  following  items  in  a  balance  sheet? 

(a)  Unpaid  subscriptions  to  capital  stock, 

(b)  Unissued  capital  stock. 

(c)  Dividends  declared  and  unpaid. 


Solution  to  Problem  14 


F  AND  G 
BALANCE  SHEET,  JUNE  30,  1919 


Exhibit  I 


ASSETS 
CAPITAL  ASSETS: 
Real  Estate 

&  Bldgs.    130,083.27 
llachy.  & 
other 

Equip.       19,093.09 
Tool  Equip.     1,903.23 


Total  Capital  Assets  $  51,079.59 

CURRENT  ASSETS: 

Inventories 
of  Finished 
Product     5  1,835.07 

Raw  Material    1,108.37 

Customers* 

Accounts     51,027.03 

Notes 

Receivable    4,705.27 

Accrued  In- 
terest on 
Notes  Re- 
ceivable      135.34 

Cash  12,403.24 


Total  Current  Assets    71,214.32 


LIABILITIES 
CAPITAL  ACCOUNTS:    F 
Balance  at 
July  1, 
1918 
Profits  for 

year 
Interest  on 
Capital 


$23,983.27  $  17,093.27 

27,633.86   27,633.85 

1,800.06    1,374.46 


LESS— 

drawings 

Balance  at 
June  30, 
1919 


$53,417.19  $46,101.58 
1,800.00    1,700.00 


$51,617.19  $44,401.58 


Total  of  Capital 
Accounts 


$96,018.77 


CURRENT  LIABILITIES: 

Bills 
Payable 

Accounts 
Payable 

Accrued  In- 
terest on 
Bills 
Payable 


$  9,000.00 
17,091.07 

184.07 


Total  Current 
Liabilities 


26,275.14 


Total  All  Assets 


$122,293.91   Total  Capital  &  Liabilities  $122,293.91 


Copyright,  1919,  The  Ronald  Press  Company 


I 1-8-6 


Exhibit  II 


F  AND  G 

COMPARATIVE  STATEMENT  OF  PROFIT  AND  LOSS 

SIX  MONTHS  ENDING  DECEMBER  31,  1918,  AND  JUNE  30,  1919 


PARTICULARS 
Sales 

Cost  of  Sales  (Ex- 
hibit II-A) 

Gross  Profit  from 
Operation 

Less — 

Selling  Expenses 
General  and  Adm, 
Expenses 


SIX  MONTHS  ENDING   SIX  MONTHS  ENDING        INCREASE 
DECEMBER  31,  1918    JUNE  30,  1919        OR  DECREASE* 

Amount   %  to  Sales  Amount  %  to  Sales  Amount  %  to  Sales 
$59,276.05  100.00   $61,323.70  100.00   $2,047,65   

28,648.95  48.33   24,326.51  39.67   *4, 322.44   *8.66 


$30,627.10  51.67   $36,997.19  60.33   $6,370.09   8.66 


3,981.93   6.72  $  3,136.99   5.12  *$  S44.94  *1.60 
1,688.85   2.85    1,022.82   1.67     *666.03   *1.18 


$  5,670.78   9.57   $  4,159.81   6.79   *$1,510.97   *2.78 


Add — Miscellaneous 
Income  (net) 


$24,956.32  42.10   $32,837.38  53.54   $7,881.06   11.44 
1,788.93   3.02     *381.85  *0.62   *2,170.78  *3.64 


$26,745.25  45.12   $32,455.53  52.92   $5,710.28   7.80 
Less—Interest  (net)    1,081.36   1.82     *322.81  *0.53   *1,404.17  *2.35 


$25,663.89  43.30   $32,778.34  53.45 
Less — Interest  on 

Partners'  Accounts    1,232.30   2.08    1,942.22   3.17 


,114.45  10.15 
709.92   1.09 


Surplus  Net  Profits  $24,431.59  41.22  $30,836.12  50.28 


1,404.53   9.06 


Distributed  as 
follows; 
F 
G 


$12,215.80 
12,215.79 


$15,418.06 
15,418.06 

$30,836.12 


Total 
$27,633.86 
27,633.85 

$55,267.71 


Total,  as  above   $24,431.59 
*Red. 


If  it  is  assumed  that  the  selling  price  is  unchanged  during  the  year,  the 
analysis  of  profits  will  appear  as  follows: 


Copyright,  1919,  The  Ronald  Press  Company 


II-8-7 


Increase  in  Gross  Profits  due  to  Increase  in  Sales  (|2,047«65 

X  51.67%)  $1,057.99 

Increase  in  Gross  Profits  due  to  proportionate  decrease  in 

Cost  of  Sales  ($61,323,70  x  8.66%)  5,31?.10 


Total  Increase  in  Gross  Profits  $6,370.09 

Add—Decrease  in 

Selling  Expenses  $  844.94 

General  and  Administrative  Expenses       666.03     1,510.97 


$7,881.06 


Deduct — Decrease  in  Miscellaneous  Income       $2,170.78 

Increase  in  Interest  (net)  1,404.17       766.61 


',114.45 


Deduct — Increase  in  Interest  Allowance  on  Partners'  Capital 

Accounts  709.92 


Net  Increase  in  Surplus  Net  Profits  $6,404.53 


F  AND  G 
STATEMENT  OF  COST  OF  PRODUCTION  AND  GOODS  SOLD 

SIX  MONTHS  ENDED  SIX  MONTHS  ENDED 

DECEMBER  31,1918  JUNE  30,  1919 
RAW  MATERIALS  USED: 

Inventory  of  Raw  Material 

at  beginning  of  the  period     $  9,027.03  $   989.11 

Raw  Materials  purchased           9,133.91  12,382.09 


$18,210.94  $13,371.20 

Less — Inventory  of  Raw  Mat- 
erial at  end  of  period  989.11  $17,221.83   1,108.37  $12,262.83 


PRODUCTIVE  LABOR  9,988.91  8,957.34 

FACTORY  EXPENSES: 

Heat  and  Power  $  1,403.27           $  1,501.56 

Taxes  341,55              446.89 

Insurance  451.05               330.98* 

Factory  Expenses  818.17  3,014.04   1,086.15   3,365.58 


Cost  of  Goods  Manufactured  $30,224.78  $24,585.75 

INVENTORY  VARIATIONS: 

Inventory  of  Finished  Product 

at  beginning  of  the  period     $ $  1,575.83 

Inventory  of  Finished  Product 

at  end  of  period  1,575.83   1,575.83   1,835.07     259.24 


Cost  of  Goods  Sold  (Exhibit  II)         $28,648.95  $24,326.51 


Copyright,  1919,  The  Ronald  Press  Company 


II-8-8 


Exhibit  III 


SUMMARY  OF  PARTNERS'  CAPITAL  ACCOUNTS 


Balance  as  at  July  1,  1918 

ADD— Prof  its  for  the  six  months  ending 

December  31,  1918 
Interest  on  Capital  Accounts  for  the 

six  months  ending  December 

31,  1918 


DEDUCT — Cash  withdrawals  during  the 

six  months  ending  December  31,  1909 

Balance  as  at  December  31,  1918 
ADD~Interest  on  Capital  Accounts  for  the 

six  months  ending  June  30,  1919 
Profits  for  the  six  months  ending 

June  30,  1919 


DEDUCT — Cash  withdrawals  during  the  six 
months  ending  June  30,  1919 

BALANCE — Capital  Accounts  June  30,  1919, 
as  per  balance  sheet  as  of  that  date 


F  G       TOGETHER 

$23,983.27  $17,093.27  $41,076.54 

12,215.80   12,215.79   24,431.59 


719.50      512.80    1,232.30 


$36,918.57  $29,821.86  $66,740.43 
900.00    1,100.00    2,000.00 


$36,018.57  $28,721.86  $64,740.43 

1,080.56      861.66    1,942.22 

15,418.06   15,418.06   30,836.12 


$52,517.19  $45,001.58  $97,518.77 
900.00      600.00    1,500.00 


$51,617.19  $44,401.58  $96,018.77 


ANSWERS  TO  QUESTIONS 


Answer  to  Question  26 — 


(a)  Fixed  charges  are  those  expenditures  that  are  of  a  more  or  less  fixed 
nature  in  connection  with  the  conduct  of  a  business  and  include  such  items 

as  interest  on  bonded  indebtedness,  provision  for  sinking  fund,  etc.   The 
term  is  used  particularly  among  public  utility  corporations,  although  its  us© 
has  extended  to  other  companies. 

(b)  Replacement  expenditures  are  those  expenditures  incurred  in  the 
renewal  or  replacement  of  plant,  machinery,  tools,  and  other  equipment  which 
are  worn  out  or  obsolete.  Expenditures  of  this  nature  must  be  met  out  of 
profits  or  earnings. 

(c)  Maintenance  expenditures  are  expenditures  incurred  in  connection  with 
the  repair,  maintenance,  or  upkeep  of  a  property  in  order  to  maintain  the 
necessary  efficiency  to  permit  of  the  successful  operation  of  the  property. 
This  class  of  expenditure  is  chargeable  against  the  period  in  which  the  same 
was  incurred,  and  under  no  circumstances  can  ordinary  repairs  be  carried 
forward  as  a  deferred  charge  against  a  subsequent  period.   In  some  businesses. 


Copyright,  1919,  The  Ronald  Press  Company 


II-8-9 

particularly  a  business  of  "seasons,"  it  is  necessary  to  make  some  provision 
during  the  producing  period  for  repairs  that  necessarily  have  to  be  deferred 
until  the  "slack"  or  intervening  period.   This  is  generally  accomplished  by 
debiting  Operating  Expenses  and  crediting  "Provision  for  Accrued  Repairs." 
This  amount  may  be  based  on  a  certain  sum  "per  ton"  of  product  produced,  or  on 
past  experience. 

Answer  to  Question  27 — Capital  assets  are  those  more  or  less  permanent  in 
nature,  by  means  of  which  the  business  is  carried  on,  and  which  are  held  for 
the  purpose  of  earning  income,  and  not  for  the  purpose  of  sale,  e.g.,  land, 
buildings,  plant,  machinery,  etc 

If  asked  to  explain  why  the  capital  assets  appear  in  the  balance  sheet  in 
amounts  in  excess  of  what  they  would  realize  if  sold,  the  auditor  should  say 
that  it  is  not  necessary  to  take  into  account  the  market  value  of  capital 
assets  which  may  be  subject  to  considerable  fluctuations.   The  question  to 
consider  is  their  value  to  the  business  as  a  going  concern,  and  not  the 
break-up  value.   In  the  event  of  a  forced  realization,  heavy  losses  would 
probably  ensue,  but  it  would  not  be  reasonable  to  anticipate  such  losses 
before  arriving  at  the  current  profits  of  the  business. 

Answer  to  Question  28 — 

(a)  Additions  and  extensions  to  property,  $98,102.15.  From  the  descrip- 
tion of  the  expenditure  it  is  quite  obvious  that  the  amount  is  a  proper  charge 
to  Capital  Account. 

(b)  Extraordinary  repairs  and  renewals,  $18,027.11.   These  charges  should 
be  made  against  the  Depreciation  Reserve,  being  expenditures  incurred  in 
making  good  depreciation  and  prolonging  the  life  of  the  equipment  repaired 
and  renewed. 

(c)  Ordinary  repairs  and  renewals,  $27,081.33.   These  expenditures  must  be 
charged  to  the  current  operating  expenses  of  the  period  in  which  they  were 
incurred  and  under  no  circumstances  can  they  be  carried  forward  as  "Deferred 
Charges." 

(d)  The  replacement  value  of  $125,091.27  is  proper  charge  against 
Property  Account,  provided  that  the  same  account  is  relieved  by  a  charge 
against  the  Depreciation  Reserve  of  the  estimated  original  cost  value 
(181,047.27)  of  the  equipment  replaced.   In  this  case  the  salvage  of 
$9,818.28  recovered  would  be  credited  to  the  Depreciation  Reserve  Account. 


Answer  to  Question  29-- 

Scrap 

Depreciation  Reserve 

To — Property  Account 


(a) 


9  10,000.00 

91,000.00 


$101,000.00 


To  write  off  value  of  buildings  torn  down. 


Copyright,  1919,  The  Ronald  Press  Company 


II-8-10 


Property  Account  |175,000«00 

To — Construction  Account  $175,000.00 

To  set  up  value  of  completed  buildings. 

(b) 

Depreciation  Reserve  31,093.87 

To — Construction  31,093.87 

Value  of  extraordinary  renewals  of 
machine  shop  equipment. 

Answer  to  Question  30— 

(a)  The  expenditure  of  $11,383.11  apparently  represents  extensive  repair 
and  renewal  work  in  connection  with  the  soap-making  machinery  and  if  this  is 
the  case  the  amount  would  be  a  proper  charge  against  the  Depreciation  Reserve 
Account.   The  information  given  in  the  question  is  too  meager  to  definitely 
state  the  most  conservative  treatment  to  adopt — the  facts  would  have  to  be 
ascertained.   It  may  be  that  the  amount  should  be  apportioned  between  (1) 
repairs  and  renewals  and  (2)  depreciation  reserve. 

(b)  The  advance  of  $5,000  to  John  Smith  should  be  charged  to  his  account 
and  shown  on  the  face  of  the  balance  sheet  under  the  general  heading  of 
Deferred  Charges  as  "Prepaid  Salaries."   The  amount  should  be  written  off 
against  the  six  months'  operations  in  monthly  instalments  of  $833.33  each. 

(c)  The  improvement  expenditure  of  $25,000  on  the  machine  shop  equipment. 
As  previously  pointed  out,  improvement  expenditures  are  frequently  regarded 
as  capital  charges.  It  may  be  that  in  this  case  some  part  of  the  amount  of 
$25,000  represents  capital  outlay.   Improvement  expenditures,  from  a  con- 
servative point  of  view,  are  in  the  nature  of  deferred  operating  charges  to  be 
written  off  in  a  few  years*  time  or  over  the  estimated  life  of  the  improvement 


BRANCH  HOUSE  ACCOUNTING 

In  connection  with  the  development  of  large  scale  operations,  it  fre- 
quently becomes  desirable  for  a  business  to  maintain  plants  or  branches  in 
various  parts  of  the  country.  Inasmuch  as  the  central  office  may  be  located  at 
a  distance  from  the  branches,  it  is  necessary  to  devise  special  methods  of  con- 
trol properly  to  handle  their  accounts. 

CURRENT  ACCOUNTS  BETWEEN  OFFICES— The  home  office  will  provide  in  its 
general  ledger  an  account  for  each  branch  and,  conversely,  each  branch  will 
maintain  an  account  with  the  home  office.   In  case  there  are  a  number  of  branch 
accounts,  it  is  desirable  to  place  these  accounts  in  a  separate  ledger  under 
a  control  account  in  the  general  ledger.   Transactions  between  branches  are 
likely  to  occur  frequently,  but  it  is  desirable  to  handle  such  transactions 
through  the  home  office  books.  The  Home  Office  Account  on  the  books  of  the 
branch  is  charged  or  credited  with  all  transactions  and,  similarly,  these 
transactions  are  listed  on  the  Branch  Current  Account  in  the  home  office  books. 
The  frequency  of  branch  house  reports,  as  well  as  the  amount  of  detail  informa- 

Copyright,  1919,  The  Ronald  Press  Company 


II-8-11 

tion  to  be  included,  depends  upon  the  volume  of  trainsactions.  Daily  statements 
are  sometimes  used,  but  more  often  weekly  or  monthly  statements  are  provided 
for. 

Branch  House  Accounts  should  be  reconciled  monthly  or  more  frequently  with 
the  home  office  books;  i.e.,  all  items  making  up  the  difference  between  the 
balances  on  the  branch  and  home  office  accounts,  representing  mostly  in- 
transit  items,  should  be  listed.   The  reconciliation  is  usually  prepared  by 
the  branch  and  may  be  made  up  in  the  following  manner: 

Charges  by  branch — not  credited  by  home  office       | ~ 

Credits  by  home  office — not  taken  up  by  branch  house   


Credits  by  branch — not  charged  by  home  office       |- 
Charges  by  home  office — not  credited  by  branch  house 

Difference  in  accounts  S- 


Such  differences  can  then  be  properly  classified  for  balance  sheet  pur- 
poses; thus,  if  the  open  items  represent  merchandise  in  transit  the  inventory 
account  would  be  debited  or  credited  as  the  case  may  be;  if  cash  items  are  in 
transit  the  cash  account  in  the  balance  sheet  must  be  adjusted,  etc. 

PREPARATION  OF  REPORTS  FOR  LARGE  ORGANIZATIONS — Large  organizations  having 
many  plants  and  branches,  each  carrying  its  own  set  of  books,  find  it  very  de- 
sirable to  have  a  standard  classification  of  accounts  and  standard  report  forms. 
These  are  more  readily  consolidated  or  accumulated  at  the  end  of  the  period  in 
order  to  arrive  at  the  general  balance  sheet  and  general  income  account  of  the 
company. 

The  classification  of  accounts  used  should  be  built  around  the  same  prime 
accounts  for  all  the  plants  or  branches  though,  of  course,  the  subsidiary  or 
secondary  accounts  may  not  be  the  same.   A  branch,  for  instance,  will  usually 
carry  many  accounts  in  its  ledger  that  in  the  case  of  a  plant  would  appear  in  some 
subsidiary  record.  The  same  will  hold  true  of  a  plant,  that  it  will  have  many 
accounts  that  at  the  home  office  might  appear  under  some  control  account. 

The  balance  sheets  submitted  by  the  plants  and  branches,  therefore,  should 
group  the  individual  accounts  under  prime  accounts  so  that  the  consolidation  to 
be  prepared  will  consist  only  of  prime  accounts,  i.e.,  those  which  will  appear 
in  the  final  balance  sheet  or  income  statement. 

It  is  advantageous  to  have  the  plants  and  branches  show  their  accounts  in 
detail,  as  it  enables  the  main  office  to  keep  a  better  control  over  the  branch 
accounts.  Such  accounts  as  Prepaid  Interest,  Insurance,  Accrued  Wages,  Accrued 
Taxes,  etc.,  can  be  controlled  more  readily  if  carried  in  detail.  Accounts  re- 
ceivable will  usually  appear  divided  as  between  trade  and  sundry,  and  the  trade 
accounts  classified  between  current,  past  due,  suspended,  etc. 

CLOSING  OF  ACCOUNTS  AND  PREPARING  REPORTS— Branches  and  plants  should  close 
their  books  at  the  end  of  the  period  in  the  usual  way.   Their  nominal  accounts 
are  all  closed  out  to  Profit  and  Loss  and  a  statement  prepared.  This,  together 
with  a  balance  sheet,  is  forwarded  to  the  home  office.  At  the  same  time  the 

Copyright,  1919,  The  Ronald  Press  Company 


II-8-12 

branch  will  make  an  entry  transferring  the  balance  in  its  Profit  and  Loss  Account 
to  its  Home  Office  Account. 

The  home  office  then  picks  up  this  Profit  and  Loss  of  the  plant  or  branch 
and  transfers  it  from  the  current  account  to  the  general  Profit  and  Loss  Ac- 
count.  It  closes  out  its  own  Income  accounts  and  draws  off  a  trial  balance 
after  closing  which  is  its  balance  sheet. 

The  general  balance  sheet  is  then  prepared  by  combining  all  plant  and 
branch  house  balance  sheets  with  the  home  office  and  eliminating  inter-office 
accounts.  A  general  Income  account  would  be  prepared  in  a  like  manner  by  com- 
bining all  the  individual  income  statements  and  eliminating  the  interoffice 
transactions.  Columns  on  a  working  sheet  may  be  headed  up  thus  (arranged 
horizontally) : 

1.  Home  Office  Balance  Sheet 

2.  Plant  1 

3.  Plant  2 

4.  Branch  1 

5.  Branch  2 

6.  Total  (Home  Office,  Plants,  and  Branches) 

7.  Interoffice  Eliminations — Debits 

8.  Interoffice  Eliminations — Credits 

9.  Combined  Balance  Sheet 

Similar  procedure  is  applicable  to  the  Income  account. 

REFERENCES : 

Dicksee,  Advanced  Accounting,  pages  23-29 
Kester,  Vol.  2,  Chapter  XXX 


Copyright,  1919,  The  Ronald  Press  Company 


II-9-1 


:OMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  9 
DISTRIBUTION  OF  FACTORY  BURDEN 


Problem  20 

Prepare  a  statement  from  the  following  showing  the  factory  departmental  ex- 
penses and  the  percentage  of  burden  in  each  department  for  the  year: 


Wages  of  Unskilled  Workmen 

Light 

Depreciation 

Repairs  and  Renewals 

Taxes 

Oil  and  Waste 

Power  Expense 

Productive  Labor 


DEPT.  A 

$20,013.11 

1,078.27 

3,989.23 

4,098.28 

1,100.00 

989.50 

2,138.17 

93,107.32 

GENERAL  FACTORY  EXPENSES 


Superintendent • s  Salary 
Foremen's  Salaries 
Factory  Office  Salaries 
Telegraph  and  Telephone 
Stationery  and  Printing 


DEPT.  B 
$  18,073.27 
1,303.05 
4,809.32 
9,081.78 
1,400.00 
1,208.43 
3,289.42 
101,391.42 


$6,000.00 

8,950.00 

4,780.00 

308.92 

989.32 


DEPT.  C 
$14,091.34 
1,811.32 
8,073.11 

10,108.33 
1,800.00 
1,383.11 
3,033.11 

98,103.12 


The  general  factory  expenses  to  be  apportioned  over  the  three  factory  de- 
partments in  the  same  proportion  as  the  productive  labor  of  each  bears  to  the 
total  productive  labor. 

Problem  21 

On  January  1,  1918,  A,  B,  and  C  enter  a  joint  venture  in  oil  lands,  agreeing 
to  share  profits  and  losses  equally.  There  are  two  adjacent  properties,  called 
the  Royal  and  Arcadia  wells,  respectively,  the  cost  of  which  to  the  partners 
follows: 

Lease  for  27  years  $62,000.00   $33,000.00 

Less  Mortgage  given,  (dated  Jan.  1,  1918  (6%)    41,000.00    10,000.00 


Cash  Consideration  January  1,  1918 

Legal  Fees  re  Title  March  1,  1918 

Land  Improven;ents  and  Construction  Work  up  to 

December  31,  1918  12,500.00 

Repairs,  Labor,  and  Operating  Expenses  for  1918   15,250.00 


$21,000.00   $23,000.00 
1,250.00     1,300.00 


10,100.00 
11,600.00 


Total  cash  outlay  to  December  31,  1918 


$50,000.00   $46,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


JI-9-2 

In  addition.  A,  as  manager  of  the  properties,  is  to  be  credited  with  a  salary 
of  $4,000  for  1918,  chargeable  to  the  Royal  wells;  and  B,  as  his  assistant, 
with  $2,000,  chargeable  to  the  Arcadia  wells.  A  has  assumed  the  Royal  mort- 
gage and  B  the  Arcadia  mortgage,  while  C  has  financed  the  remainder  of  the 
venture  which  has  consisted  of  cash  receipts  from  sales  amounting  to  $75,000  for 
the  Royal  and  ;$88,000  for  the  Arcadia  and  the  cash  outlay  of  $96,000  listed 
above.  C  is  to  te  credited  with  interest  at  6%  on  original  property  payments 
made,  including  legal  fees,  from  the  date  of  payment,  £ind  on  all  other  expendi- 
tures from  an  average  date,  which  in  the  case  of  construction  work  is  fixed  at 
July  1,  and  operating  expenses  at  August  1,  and  is  to  be  debited  similarly  with 
interest  on  sales  receipts  as  though  all  had  been  received  November  1. 

It  is  estimated  that  in  1918  one  twenty-fourth  of  the  expected  flow  of  the 
Royal  wells  and  one-twentieth  of  the  Arcadia  wells  had  been  produced,  there 
teing  on  December  31,  1918,  an  inventory  of  oil  on  hand  and  unpaid  customers* 
accounts  as  follows: 


Royal 
Arcadia 

CUSTOMERS* 
ACCOUNT 

$21,500.00 
32,600.00 

OIL  ON 
Market 
$  4,875.00 
32,700.00 

HAND 
Cost 
$1,500.00 
4,400.00 

Total 

$54,100.00 

$37,575.00 

$5,900.00 

The  land  improvements  and  construction  work  are  to  be  regarded  as  having  been 
in  use  throughout  the  year.   They  will  last  as  long  as  production  continues,  at 
the  end  of  which  time  they  will  have  an  approximate  scrap  value  of  $1,000  for 
each  well. 

Neglecting  income  and  profits  taxes,  prepare: 

(a)  A  statement  showing  the  profits  and  income  to  which  each  partner  is 

entitled. 

(b)  A  balance  sheet  as  of  December  31,  1918. 

On  January  1,  1919,  the  Royal  wells  are  disposed  of  for  $250,000  cash,  the 
purchaser  assuming  the  mortgage  and  taking  over  the  inventory  on  hand  and  the 
customers*  accounts  receivable  pertaining  to  the  Royal  wells.  Prepare: 

(c)  The  necessary  journal  entries  to  record  the  transaction. 


Copyright,  1919,  The  Ronald  Press  Company 


II-9-3 

MISCELLANEOUS  QUESTIONS 

Question  41 — How  would  you  suggest  that  the  following  expenditures  be  dis- 
tributed: 

(a)  Expenditures  totaling  $93,083.11  in  respect  of  real  estate,  build- 

ings and  machinery  purchased.   The  machinery  was  purchased  to 
replace  other  machinery  of  a  cost  value  of  $8,131.81.   Adequate 
provision  has  been  made  for  depreciation, 

(b)  Officers'  salaries,  totaling  |32,500,  in  a  gas  company  that  has  com- 

pleted and  is  operating  about  one-half  its  plant  and  is  engaged  in 
constructing  and  equipping  the  remainder. 

(c)  Capital  stock  amounting  to  $200,000  is  issued  to  pay  for  a  leasehold 

having  27  years  to  run. 

Question  42 — How  would  you  distribute  the  following  expenditures,  i.e., 
between  Capital  and  Revenue  Accounts? 

(a)  Extensive  repairs  to  the  power  house  equipment  at  a  total  cost  of 

$4,391.27. 

(b)  A  boiler  house  was  remodeled  and  extended  in  order  to  permit  of  the 

installation  of  larger  and  more  modern  type  of  vertical  water 
tube  boilers.   The  expenditures  for  remodeling  aggregate  $4,131.11 
and  those  for  the  extension  $5,103.71. 

Question  43 — How  should  the  following  expenditures  be  distributed  in  the 
accounts  of  a  manufacturing  concern: 

(a)  Repair  and  renewal  of  machine  shop  equipment  at  a  total  cost  of 

$11,032.11. 

(b)  Construction  expenditures  in  connection  with  the  extension  of  the 

blacksmith  shop,  the  charges  aggregating  $27,013.18. 

State  your  reasons  for  distributing  the  items  in  the  manner  suggested. 

Question  44~Vrtiat  is  your  understanding  of  the  following: 

(a)  Work  in  process 

(b)  Direct  or  productive  labor 

(c)  Overhead  expenses;  furthermore,  what  are  two  classes  of  overhead 

expenses? 

Question  45 — The  value  of  a  certain  inventory  of  finished  products  on  hand 
at  December  31,  1918,  is  as  follows: 

Materials  $193,000.75 

Productive  labor  98,111.32 

Factory  overhead  (basis  of  100%  of  productive  labor)   98,111.32 


Total  $389,223.39 


The  actual  factory  expenses  amounted  to  120%  of  the  productive  labor  for 
the  year.  Do  you  consider  that  the  inventory  has  been  properly  valued? 

Copyright,  1919,  The  Ronald  Press  Company 


II-9-4 

Solution  to  Problem  15 

(1) 

Realization  and  Liquidation  Account  $40,000.00 

To — Sundry  Assets  140,000.00 

To  transfer  sundry  assets  to  Realization  and 
Liquidation  account. 

(2) 

Sundry  Creditors  14,000.00 

To — Realization  and  Liquidation  Account  14,000.00 

To  transfer  sundry  liabilities  to  Realization 
and  Liquidation  account. 

(3) 
Cash  14,000.00 

To — Realization  and  Liquidation  Account  14,000.00 

First  instalment  from  realization  of  assets. 

(4) 
Realization  and  Liquidation  Account  14,000.00 

To — Cash  14,000.00 

Payment  of  sundry  creditors  in  full. 

(5) 
Cash  10,000.00 

To — Realization  and  Liquidation  Account  10,000.00 

Second  instalment  from  realization  of  assets. 

(6) 
B — Capital  Account  5,000.00 

C—   "       "  1,000.00 

To — Cash  6,000.00 

To  adjust  partners'  capital  investment  ratio 
to  profit  and  loss  sharing  ratio. 

(7) 

A — Capital  Account  2,000.00 

B—   "       "  1,000.00 

C—   "       "  1,000.00 

To — Cash  4,000.00 

To  distribute  balance  of  cash  on  hand  on  basis 
of  adjusted  capital  accounts — one-half  to  A, 
one-quarter  to  B,  and  one-quarter  to  C;  the 
capital  ratio  now  being  the  same  as  the 
profit  and  loss  sharing  ratio. 

(8) 
Cash  10,000.00 

Jo — Realization  and  Liquidation  Account  10,000.00 

Final  instalment  from  realization  of  assets. 

Copyright,  1919,  The  Ronald  Press  Company 


C9) 
A — Capital  Account 
B —   "       " 
C —   ■       " 
To — Cash 
To  charge  each  partner  with  his  proportion  of 
loss  on  realization  of  assets. 


$3,000.00 
1,500.00 
1,500.00 


II-9-5 


16,000.00 


(10) 
A — Capital  Account 
B —   ■       ■ 
C —   "       " 
To — Cash 
To  distribute  balance  of  cash  on  hand  and  close 
capital  accounts. 


5,000.00 
2,500.00 
3,500.00 


10,000.00 


SUMMARY  OF  PARTNERS'  CAPITAL  ACCOUNTS 


PARTICULARS 
Original  Investment 
Cash  Dividend  to  Equalize  Capital  Accounts 

Adjusted  Capital  Accounts 
Cash  Dividend 

Adjusted  Capital  Accounts 
Loss  on  Realization 

Cash — Final  Dividend 


ABC    TOGETHER 

$10,000  $10,000  $6,000  $26,000 

5,000   1,000    6,000 


$10,000  $  5,000  $5,000  $20,000 
2,000    1,000   1,000    4,000 


$  8,000  $  4,000  $4,000  $16,000 
3,000    1,500   1,500    6,000 


$  5,000  $  2,500  $2,500  $10,000 


A  B  &  C 
REALIZATION  AND  LIQUIDATION  ACCOUNT 
(DATE) 


ASSETS  TO  BE  REALIZED: 
Sundry  Assets 

LIABILITIES  LIQUIDATED: 
Sundry  Creditors 


$40,000.00 
14,000.00 


LIABILITIES  TO  BE  LIQUIDATED: 

Sundry  Creditors  $14,000.00 

ASSETS  REALIZED: 

Sundry  Assets  34,000.00 

LOSS  ON  REALIZATION  AND 
LIQUIDATION  DIVIDED  AS 
FOLLOWS : 

A         $3,000.00 

B  1,500.00 

C  1,500.00    6,000.00 


$54,000.00 


$54,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-9-6 

Solution  to  Problem  16 


Exhibit  A 


HENRY  PARKER,  RECEIVER  FOR 

ASHTON  MANUFACTURING  COMPANY 

BALANCE  SHEET,  DECEMBER  31,  1918 


ASSETS 
CURRENT  ASSETS: 

Cash        $  5,650.00 
Accounts 

Receivable   12,140.00 
Inventory 

of  Raw 

Material     38,400.00 
Inventory  of 

Finished 

and  Partly 

Finished 

Goods 


26,120.00  5  82,310.00 


UNAMORTIZED  DISCOUNT  ON 
RECEIVER'S  CERTIFICATES 


3,000.00 


LIABILITIES 
CURRENT  LIABILITIES: 
Accounts 

Payable     $31,240.00 
Interest 

Accrued       2,700.00  $  33,940.00 


FIRST  MORTGAGE  BONDS: 
Par  Value     |50,000.00 
Reserve  for 

Premium      5,000.00 


RECEIVER'S  CERTIFICATES: 
Two-year  notes 
dated  July 
1,  1918 


55,000.00 


40,000.00 


CAPITAL  ASSETS: 

Real  Estate  $  75,000.00 
Machinery  and 

Equipment    80,000.00 


$155,000.00 
Less — Reserve 
for  De- 
preciation  29,500.00  125,500.00 


$210,810.00 


NET  WORTH: 
Capital  Stock 
Surplus : 
Balance 
(debit) 
January 
1,  1918 
Surplus  Net 
Profits  for 
year  (Ex- 
hibit B) 


80,000.00 


1,900.00 


8,770.00    1,870.00 


$210,810.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-9-7 

HENRY  PARKER,  RECEIVER  FOR  Exhibit  B 

ASHTON  MANUFACTURING  COMPANY 
STATEMENT  OF  PROFIT  AND  LOSS 
YEAR  ENDING  DECEMBER  31,  1918 

SALES  $358,000.00 

Less — Cost  of  Sales: 

Materials  used  $  88,800.00 

Factory  Expenses  (including  Labor 

and  Depreciation)  207,450.00   296,250.00 


GROSS  PROFIT  FROM  RECEIVER'S  OPERATIONS  $  61,750.00 

DEDUCT— General  and  Selling  Expenses  $  41,100.00 

Receiver's  Expenses  6,680.00    47,780.00 


NET  PROFIT  EXCLUSIVE  OF  INTEREST  $  13,970.00 

DEDUCT — Interest : 

Bond  Interest  $  3,000.00 

Interest  on  Receiver's  Certificates 

(including  proportion  of  discount)         2,200.00     5,200.00 


SURPLUS  NET  PROFIT  FOR  YEAR  (Exhibit  A)  $  8,770.00 


NOTE — The  receiver  may  desire  to  qualify  the  above  statements  with  respect 
to  the  items  for  which  he  disclaims  all  responsibility,  such  as  interest ;  or 
he  may  set  up  in  parallel  vertical  columns  the  accounts  appearing  in  each  set 
of  books  In  addition  to  the  consolidation  above  shown. 


Solution  to  Problem  17 

(1) 

Cash  $105,000.00 

To — A — Capital  Account  $  52,500.00 

B—   "        "  52,500.00 

To  record  the  capital  contributed  by  A 
and  B. 

(2) 
Real  Estate  Account  250,000.00 

To — Real  Estate  Purchase  Account  250,000.00 

To  record  the  purchase  price  of  property 
acquired  from...*. • ••••• 

(3) 
Real  Estate  Purchase  Account  100,000.00 

To — Cash  100,000.00 

Casi  payment  in  connection  with  the  purchase 
of  the  property  referred  to  in  the  preced- 
ing entry, 
entry. 

Copyright,  1919,  The  Ronald  Press  Company 


II-9-8 


(4) 

Real  Estate  Purchase  Account  $150,000.00 

To — Mortgage  Obligation  Outstanding  $150,000.00 

To  record  the  mortgage  obligation  assumed 
in  connection  with  the  purchase  of 
property  from 

(5) 
Real  Estate  Account  3,000.00 

To — Cash  3,000.00 

Expenses  paid  in  connection  with  the 
property  purchased  from 


Uncollected  Rentals 

To — Income  from  Rents 


(6) 


Cash 


To — Uncollected  Rentals 


(7) 


(8) 

Maintenemce  and  Other  Expenses  in  connection 

with  the  upkeep  of  the  building 
Interest  on  Mortgage  Obligation 
To — Accounts  Payable 

(9) 

Accounts  Payable 
To — Cash 


(10) 

Real  Estate  Sale  Account 
To — Real  Estate 
To  debit  Real  Estate  Sale  Account  with 
sales  price  of  the  property  sold 
to 


310,000.00 


310,000.00 


(11) 

Real  Estate  Account  57,000.00 

To — Profit  on  Sale  of  Real  Estate  Account  57,000.00 

To  transfer  from  the  Real  Estate  Account  the 
profit  on  sale  of  real  estate, 

(12) 
Cash  160,000.00 

To — Real  Estate  Sale  Account  160,000.00 

Cash  received  in  connection  with  the 
sale  of  the  property. 


Copyright,  1919,  The  Ronald  Press  Company 


II-9-9 


(13) 
Mortgage  Obligation  Outstanding  $150,000,00 

To — Real  Estate  Sale  Account 
Mortgage  obligation  assumed  by  tbe  purchaser 
of  the  real  estate. 


$150,000.00 


(14) 
Rents  Collected  and  Other  Miscellaneous 

Incomes 
Profit  on  Sale  of  Real  Estate  Account 
To — Profit  and  Loss  Account 


(15) 
Profit  and  Loss  Account 

To — Maintenance  and  Other  Expenses  in 
connection  with  the  upkeep  of  the 
property- 
Interest  on  Mortgage  Obligation 


Profit  and  Loss  Account 

To — A — Capital  Account 
B —   "       " 


A — Capital  Account 
B —   "       " 
To — Cash 


(16) 


(17) 


57,000.00 


.90,500.00 
71,500.00 


38,000.00 
19,000.00 


162,000.00 


PROFIT  AND  LOSS  ACCOUNT 


liaintenance  and  Other  Ex- 
penses in  connection  with 

the  upkeep  of  the 

property 

Interest  on  Mortgage  Obliga- 
tion 

Balance — Net  Profit  carried 
to  the  Partners'  Accounts 
A    $38,000 
B     19,000 


57,000.00 


$57,000.00 


Profit  from  Sale  of  Real 

Estate 
Rents  Collected  eind  Other 

Miscellaneous  Income 


$57,000.00 


$57,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-9-10 


SUMMARY  OF  CASH  TRANSACTIONS 


RECEIPTS 
Capital  contributed  by  A 

and  B 
Rents  and  other  miscel- 
laneous income  collected 
Cash  received  on  account  of 
sale  of  real  estate 


$105,000.00 


160,000.00 


DISBURSEMENTS 
Payment  in  connection  with 
the  purchase  of  real  es- 
tate 
Payment  of  expenses  in  con- 
nection with  the  acquisi- 
tion of  real  estate 
Maintenance  and  other  ex- 
penses paid 
Balance  paid  to  the  partners 
A      $90,500.00 
B       71,500.00 


$100,000.00 


3,000.00 


$265,000.00 


162,000.00 
$265,000.00 


ANSWERS  TO  QUESTIONS 

Answer  to  Question  31 — Briefly  stated,  a  perpetual  inventory  provides  for 
a  system  of  book  records  of  both  quantity  and  value  kept  for  each  class  of  raw 
material  and  finished  product.  On  the  debit  side  of  the  record  the  quEintity  and 
value  of  materials  received  or  produced  are  entered,  being  in  effect  a  charge 
to  the  storekeeper  for  the  materials  turned  over  to  him;  and  on  the  credit  side 
the  quantity  and  cost  value  of  materials  consumed  or  sold  are  entered,  thus 
relieving  the  storekeeper  of  that  part  of  the  materials  accounted  for.  The 
difference  between  the  debit  and  credit  balances  represents  approximately  the 
quantity  and  value  of  material  on  hand,  which  can  be  verified  by  the  taking  of  a 
physical  inventory  (which  is  usually  undertaken  when  a  particular  class  of  stock 
is  at  a  low  ebb),  and  any  difference  can  then  be  adjusted  by  writing  the  same  off 
to  the  Profit  and  Loss  Account  of  the  period  through  an  intermediate  account 
entitled  "Inventory  Adjustment  Account." 

The  advantages  of  keeping  book  or  "perpetual"  inventories  are:  (1)  that 
fairly  accurate  statements  of  profits  can  be  prepared  without  necessitating  the 
taking  of  a  physical  inventory;  (2)  it  provides  the  means  of  keeping  a  stricter 
control  over  the  issuance  of  materials  and  stock. 

The  controlling  or  general  ledger  accounts  opened  in  connection  with  a 
system  such  as  that  outlined  above  are  as  follows: 


Copyright,  1919,  The  Ronald  Press  Company 


II-9-11 

STOCK  ACCOUNT 
trolling  Account 
diary  books  or  records) 
CREDIT  WITH 

Total  cost  value  (including  freight 
and  handling  charges)  of  materials 
consumed  as  per  production  reports— 
contra  a  debit  to  Work  in  Progress 
Controlling  Account  (see  below). 
Total  cost  value  of  materials  returned 
to  shippers — contra  a  debit  to  Aud- 
ited Vouchers  Controlling  Account, 
(A  column  might  also  be  introduced  on 
the  credit  side  of  the  account  in  which 
the  total  quantities  consumed  or  re- 
turned could  be  recorded.) 

The  balance  of  the  account  is  the  quantity  and  cost  value  of  materials  on  hand  at 
end  of  period  as  per  summary  of  balances  of  substock  accounts  carried  in  the 
subsidiary  stock  book  or  record. 


RAW  MATERIALS 
General  Ledger  Con 
(Details  carried  in  subsi 
DEBIT  WITH 

Total  invoice  value  of  raw  materials 
purchased — contra  a  credit  to  Aud- 
ited Vouchers  Controlling  Account. 
Total  freight  and  handling  charges 
thereon — contra  a  credit  to  Aud- 
ited Vouchers  Controlling  Account. 
(A  column  might  be  introduced  on  the 
debit  side  of  account  in  which  the  total 
quantities  purchased  could  be  recorded. ) 


WORK  IN  PROGRESS  ACCOUNT 

General  Ledger  Controlling  Account 

(Details  carried  in  subsidiary  books  or  records) 

CREDIT  WITH 


DEBIT  WITH 

Total  cost  value  (including  freight 
and  handling  charges)  of  materials 
consumed  as  per  production  reports 
— contra  a  credit  to  the  Raw  Mate- 
rials Stock  Account  (see  above). 

Total  wages  of  workmen  directly  en- 
gaged in  the  manufacture  of  the 
goods — contra  a  credit  to  the  Aud- 
ited Vouchers  Controlling  Account. 

Total  factory  or  indirect  expenses 
chargeable  to  orders  in  process  of 
manufacture — contra  a  credit  to  the 
Factory  Expenses  Account. 


Total  manufacturing  cost  of  finished 
goods  produced  during  the  period— 
contra  a  debit  to  the  Finished 
Product  Stock  Account  (see  below). 


The  balance  of  the  account  is  the  manufacturing  cost  value  of  work  in  progress  of 
manufacture  or  uncompleted  work  at  any  given  date.  The  detailed  orders  or  sub- 
work  in  progress  accounts  are  carried  in  a  subsidiary  book  or  record  and  a 
sunanary  of  the  total  should  agree  with  the  balance  called  for  by  the  controlling 
account. 


Copyright,  1919,  The  Ronald  Press  Company 


II-9-12 

FINISHED  PRODUCT  STOCK  ACCOUNT 
General  Ledger  Controlling  Account 
(Details  carried  in  subsidiary  books  or  records) 
DEBIT  WITH  CREDIT  WITH 

Total  manufacturing  cost  value  of       Total  manufacturing  value  of  finished 
finished  goods  produced  during  the       goods  shipped  to  Customers — 
period — contra  a  credit  to  the         contra  a  debit  to  Cost  of  Goods 
Work  in  Progress  Account  (see  Sold  Account, 

above). 
Total  manufacturing  cost  value  of 
finished  goods  returned  by  Cus- 
tomers— contra  a  credit  to  the 
Cost  of  Goods  Sold  Account. 

The  balance  of  the  account  is  the  manufacturing  cost  value  of  finished  goods  on 
hand.  The  details  of  the  various  kinds  of  finished  products  on  hand  are  carried 
in  a  subsidiary  book  or  record  and  a  trial  balance  abstracted  therefrom  should 
agree  with  the  amount  called  for  by  the  controlling  accoimt. 

Answer  to  Question  32 — 

(a)  Finished  products  on  hand  should  be  valued  at  the  cost  of  the  materials 
used,  productive  labor  expended  and  proportion  of  factory  or  indirect  expenses. 
The  factory  cost  thus  arrived  at  should  be  less  than  the  list  or  selling  value  - 
if  not  a  reserve  should  be  created  to  reduce  the  inventories  to  the  basis  of 
selling  values  less  a  further  deduction  to  cover  the  estimated  cost  of  selling, 

(b)  Goods  in  process  of  manufacture  should  be  valued  at  the  factory  cost  to 
date,  represented  in  materials  used,  productive  labor  expended  and  proportion 
of  the  factory  expenses  chargeable  thereto,  assuming  that  the  factory  has  been 
operating  under  normal  conditions,  and  that  the  factory  expenses  were  not  out 
of  proportion  to  the  productive  labor  during  that  period, 

(c)  Inventories  of  Raw  Materials  on  hand  should  be  valued  on  the  basis  of 
cost  or  market  whichever  is  the  lower. 

Answer  to  Question  33 — The  effect  of  this  treatment  in  the  accounts  is  to 
credit  Profit  and  Loss  Account  with  an  unearned  profit — a  profit  which  may 
never  be  realized  and  commonly  referred  to  as  a  book  profit.  The  management  in 
this  case  apparently  lost  sight  of  the  distinction  between  a  saving  and  a  profit. 
The  proper  treatment  of  such  expenditures  would  be  to  charge  the  capital  asset 
accounts  with  the  actual  cost — making  no  entries  in  respect  of  the  difference 
between  the  market  and  cost  value  of  the  tools  and  equipment  manufactured, 

Xnswer  to  Question  34— 

(a)  The  guaranty  constitutes  a  contingent  liability  of  the  company  and  conse- 
quently must  be  disclosed  on  the  balance  sheet.  The  character  of  the  considera- 
tion is  immaterial.  The  fact  that  the  steel  and  iron  material  has  not  been  fur- 
nished as  yet  does  not  affect  the  contingent  liability  existing  at  the  balance 
sheet  date. 


Copyright,  1919,  The  Ronald  Press  Company 


II-9-13 

(b)  The  contingent  liability  should  be  shown  in  respect  of  $25,000,  being 
the  amount  of  the  claim.  It  would  be  preferable,  however,  to  charge  current 
Profit  and  Loss  with  the  $10,000  and  credit  a  Reserve  for  Injuries  Account, 
since  this  portion  is  a  probable  loss  and  should  be  provided  for.   If  this  were 
done  no  reference  need  be  made  to  the  remaining  $15,000  of  the  claim. 

Answer  to  Question  35 — 

(a)  The  variation  in  the  periodical  charge  to  operating  expense  under  the 
fixed  percentage  on  a  flat  basis,  fixed  percentage  on  diminishing  value,  and 
sinking  fund  methods  is  clearly  contrasted  in  Lecture  5,  page  12.   Note  that 
under  the  first  method  the  charge  is  the  same  each  year.  Under  the  second  method 
the  charge  decreases  each  year.  Under  the  third  method,  although  the  charge  to 
operating  expense  is  the  same  each  year,  the  credit  to  the  depreciation  reserve 
increases  each  year,  due  to  the  interest  accumulations.   The  periodical  charge 
under  the  "production"  method  cannot  be  stated,  as  the  quantity  of  production 
is  not  known. 

(b)  In  case  the  company  refuses  to  provide  for  depreciation  and  requires 
the  auditor  to  certify  to  the  balance  sheet  without  such  provision  being  made, 
the  auditor  should  qualify  the  property  assets  and  surplus  as  follows:  "(subject 
to  accrued  depreciation  not  provided  for)." 

Where  the  statement  of  profits  and  income  does  not  include  a  provision  for 
depreciation  and  a  certificate  thereto  is  required,  the  surplus  net  profits  for 
the  period  should  be  qualified  as  follows:  "(subject  to  current  depreciation 
not  provided  for)," 


DISTRIBUTION  OF  FACTORY  BURDEN 

1,  PRIME  COST  consists  of — 

a.  DIRECT  MATERIAL — material  taken  from  stock  and  used  in  production 

which  can  be  assigned  to  a  specific  order  or  process, 

b.  DIRECT  LABOR — time  of  workmen  spent  on  a  specific  order  or  process. 

2,  In  order  to  ascertain  the  real  cost  of  production  there  must  be  added  to 
this  prime  cost  the  proper  proportion  of  burden  or  general  factory  expenses, 

3,  GENERAL  FACTORY  EXPENSES  consist  of— 

a.  INDIRECT  MATERIAL — material  taken  from  stock  and  used  in  production 

but  which  cannot  be  assigned  to  a  specific  order,  such  as  brooms, 
oil,  and  other  factory  supplies;  repair  parts;  etc. 

b.  INDIRECT  LABOR — time  which  cannot  be  assigned  to  a  specific  order 

such  as  lost  time  of  productive  workmen,  foremen,  timekeepers, 
Janitors,  etc. 

c.  EXPENSES  connected  with  the  use  of  the  facilities  employed  in  pro-. 
/        duct ion,  such  as: 

V 

Copyright,  1919,  The  Ronald  Press  Company 


II-9-14 

Repairs  of  buildings,  machinery,  etc. 
Depreciation  of  buildings,  machinery,  etc. 
Taxes  and  insurance  on  buildings,  machinery,  etc. 
Interest  on  investment  in   "        "       " 
Power,  light,  and  heat 
Factory  supplies 

Salaries  and  expenses  of  cost  department 
Salaries  and  expenses  of  superintendent's  office 
Etc. 

4.  In  those  lines  of  business  where  all  the  costs  incurred  in  production 
cannot  be  charged  to  a  process,  some  other  method  must  be  employed  to  ascertain 
the  actual  cost  of  the  various  articles  produced,  or  jobs  worked  on,  so  as  to 
enable  the  management  to  compare  costs  from  time  to  time  in  order  to  determine 
the  operating  efficiency,  and  to  value  the  work  in  progress  and  finished  product 
inventories.  In  order  to  ascertain  the  actual  cost  of  production,  the  burden  is 
distributed  over  the  articles  produced  or  jobs  worked  upon, 

5.  No  particular  method  of  burden  distribution  can  be  applied  to  all  parts 
of  a  plant  unless  conditions  are  uniform  throughout.  Each  plan  will  produce 
accurate  results  under  certain  conditions  and  the  extent  of  its  use  is  limited 
thereby. 

6.  PERCENTAGE  ON  DIRECT  WAGES  METHOD— 

a,  PRINCIPLE — Product  increases  in  value  according  to  the  amount  of 

labor  added  thereto.   The  indirect  expenses  are  incurred  in  pro- 
portion to  the  amount  of  labor  involved,  and  this  amount  of  labor 
is  measured  by  the  cost  thereof,  i.e,,  wages  paid. 

b.  Under  this  plan  production  costs  are  segregated  under  three  headings: 

(1)  Direct  Material 

(2)  Direct  Labor 

(3)  Burden,  consisting  of: 

(a)  Indirect  Material 

(b)  Indirect  Labor 

(c)  General  Factory  Expenses 

c.  METHOD  OF  OPERATION — Monthly,  divide  the  total  burden  by  the  total 

cost  of  direct  labor.  Assuming  this  percentage  to  be  80%,  then 
for  each  dollar  of  direct  labor  charged  to  any  order,  800  is 
added  for  burden. 

d,  ADVANTAGES— 

(1)  Easy  to  understand  and  easy  to  apply 

(2)  Distributes  all  overhead  expense  incurred  during  the  period 

(3)  Produces  satisfactory  results: 

(a)  Where  the  cost  of  the  direct  labor  is  the  most  important 

factor  in  production 

(b)  Where  the  machinery  used  is  the  same  throughout  the  shop 

as  to  value  and  operating  cost 

Copyright,  1919,  The  Ronald  Press  Company 


II-9-15 

(c)  Where  the  work  passing  through  the  various  departments 

is  uniform 

(d)  Where  the  lost-time  factor  is  unimportant 


e.  DEFECTS— 

(1)  Most  of  the  general  factory  expenses  depend  on  the  time  element 

and  are  not  incurred  in  proportion  to  wages  paid 

(2)  Source  of  error  is  variable 

(3)  Is  an  average  rate  and  produces  unsatisfactory  results: 

(a)  Where  the  time  element  is  more  important  than  the  wages 

paid 

(b)  Where  labor  is  not  the  dominating  element  in  cost. 

(c)  Where  expensive  and  inexpensive  machines  are  in  use 

side  by  side 

(d)  Where  high-priced  and  low-priced  operatives  are  em- 

ployed 

(e)  Where  low-priced  operative  using  an  expensive  semi- 

automatic machine  works  with  high-priced  operative 
using  cheap  hand  machine,  or  performing  hand  labor 

(f )  Where  different  classes  of  product  pass  through  the  shop 

and  require  a  variable  use  of  the  machinery  and 
operatives 

(g)  Where  the  lost  time  factor  is  important. 

(4)  May  be  approximately  correct  as  to  total  cost  of  production 

but  it  is  inexact  as  to  the  cost  of  the  individual  articles 
of  jobs  produced, 

7.  HOURLY  BURDEN  METHOD— 

a.  PRINCIPLE — As  in  the  case  of  the  percentage  on  direct  wages  method, 
the  product  increases  in  value  in  proportion  to  the  amount  of 
labor  added  thereto.  Similarly,  the  indirect  expenses  are  in- 
curred in  proportion  to  the  amount  of  labor  involved:  but  the 
measure  of  that  amount  of  labor  is  time — i.e.,  hours  of  direct 
labor — rather  than  wages  paid, 

b»  Under  this  plan  production  costs  are  segregated  under  three  headings: 

(1)  Direct  Material 

(2)  Direct  Labor 

(3)  Burden,  consisting  of: 

(a)  Indirect  Material 

(b)  Indirect  Labor 

(o)  General  Factory  Expenses 

0.  METHOD  OF  OPERATION—Monthly,  the  total  burden  is  divided  by  the 

number  of  productive  labor  hours  for  the  same  period  to  ascertain 
the  burden  "per  hour."  Assuming  this  rate  to  be  20d  per  hour, 
then  for  each  hour  of  productive  labor  charged  to  a  specific 
article  or  job,  200  is  added  for  burden. 

Copyright,  1919,  The  Ronald  Press  Company 


II-9-16 

d,  ADVANTAGES— 

(1)  Easy  to  understand  and  easy  to  apply 

(2)  Distributes  all  overhead  expense  incurred  during  the  period 

(3)  Source  of  error  is  constant 

(4)  Burden  is  more  a  function  of  time  than  of  labor  cost 

(5)  Produces  satisfactory  results: 

(a)  Where  the  time  spent  on  a  specific  order  is  the  most 

important  factor  in  the  shop  operation,  since  the 
basis  of  distribution  is  the  number  of  hours  spent  on 
the  order  rather  than  the  wages  charged  to  that  order 

(b)  Where  the  machinery  used  is  uniform  throughout  the  shop 

(c)  Where  the  work  passing  through  the  shop  is  uniform 

(d)  Where  the  lost  time  factor  is  unimportant 

e»  DEFECTS — Is  an  average  rate  and  produces  unsatisfactory  results: 

(1)  Where  both  expensive  and  inexpensive  machines  are  in  use 

(2)  Where  different  classes  of  product  pass  through  the  shop 

making  a  variable  demand  on  the  machinery  and  operatives 

(3)  Where  the  lost-time  factor  is  important 

8.  DIRECT  LABOR  AND  MATERIAL— 

a*  PRINCIPLE — Cost  of  material  is  one  of  the  factors  giving  rise  to  in- 
direct expense,  and  the  indirect  expense  is  incurred  in  proportion 
to  the  prime  cost 

b.  METHOD  OF  OPERATION — Monthly,  divide  the  total  burden  by  the  com- 
bined cost  of  direct  labor  and  direct  material  to  ascertain  the 
percentage  to  be  added  to  the  prime  cost  for  burden 

c»  ADVANTAGES — Most  satisfactory  results  from  this  method  are  obtained 
where  direct  labor  does  not  exceed  the  cost  of  direct  material 

d.  DEFECTS— 

(1)  Subject  to  limitations  of  all  average  rate  methods 

(2)  Not  applicable  where  labor  is  a  material  factor  in  production 

(3)  Does  not  give  proper  weight  to  investment — time  factors  in 

production 

9.  OLD  MACHINE  RATE— 

a.  PRINCIPLE — Consideration  should  be  given  to  the  value  and  upkeep  of 
the  equipment  used  in  production  and  the  variable  demands  made 
thereon  by  the  various  orders r 

J),:  METHOD  OF  OPEPvATION — Each  order  using  the  machine  is  charged  at  a 

certain  rate  per  hour  of  use.  This  hourly  rate  is  usually  based  on 
the  probable  life  of  the  machine  under  full  work  and  is  used  to 
charge  an  order  with  a  proportion  of  the  interest  on  and  wear  and 
tear  of  the  machine  employed  thereon 

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II-9-17 

c,  ADVANTAGES — Provides  for  the  variation  in  the  cost  of  work  done  on 

different  types  of  machines  in  that  it  recognises  the  factor  of 
interest  on  investment  in  machinery  and  the  depreciation  and 
upkeep  thereof  by  making  a  heavier  charge  for  the  use  of  an  ex- 
pensive machine  than  for  the  use  of  a  cheaper  machine  . 

d.  DEFECTS— 

(1)  Idle  time  not  provided  for 

(2j  Used  to  distribute  other  burden  factors  through  an  arbitrary 

increase  in  the  hour  rate 
(3)  Does  not  provide  for  the  fundamental  principle  of  burden 

distribution,  viz.,  every  dollar  of  general  factory  charges 

must  be  burdened  ont  o  some  order 

10.  FIXED  MACHINE  RATE  AND  SUPPLEMENTARY  RATE— 

a.  PRINCIPLE — Factors  making  up  burden  should  be  analyzed  to  ascer- 

tain their  incidence.   The  shop  is  divided  into  its  constituent 
production  centers  and  full  play  is  given  to  the  natural  differ- 
ences between  them  as  far  as  practicable,  instead  (as  on  the 
averaging  plan)  of  throwing  them  into  one  common  receptacle  or 
lump  sum  of  shop  expenses.  Expenses  not  distributed  in  this 
manner,  together  with  idle  time,  are  prorated  through  a  "supple- 
mentary rate"  over  the  production  of  the  period. 

b.  METHOD  OF  OPERATION — Each  machine  is  considered  as  an  independent 

"production  center,"  To  such  centers  are  allocated  all  shop  ex- 
penses which  can,  on  reasonable  analysis,  be  considered  charge- 
able as  a  composite  rent  or  machine  rate  for  all  the  factors  of 
production  affecting  a  particular  production  center.   On  this 
basis  the  hourly  machine  rate  is  determined. 

Each  month  there  is  charged  to  a  Shop  Expense  Account  all  expenses 
incurred  by  that  shop  whether  they  are  expenses  entering  into 
the  machine  rate,  or  general  shop  expenses  which  could  not  be 
spread  over  the  production  centers.   This  account  is  credited 
with  the  amounts  charged  to  orders  through  the  machine  rates 
for  the  use  of  machines.  The  remaining  balance  constitutes  the 
supplementary  rate  which  may  be  spread  over  the  orders  on  the 
hourly-burden  plan  or  prorated  over  the  orders  in  proportion  to 
the  amounts  previously  charged  through  the  machine  rate. 

The  supplementary  rate,  which  consists  principally  of  idle  time  of 
machines,  becomes  an  index  to  the  current  efficiency  of  the  shop. 

0.  ADVANTAGES— 

(1)  Most  of  the  usual  "indirect"  expenses  are  distributed  as 

direct  charges  to  a  machine,  bench,  or  process,  thus 
eliminating  "averaging" 

(2)  All  expenses  possible  are  gathered  "at  the  point  of  the  tool" 

(or  other  production  center)  where  they  are  easily  applied 
to  the  product  operated  on 

Copyright,  1919,  The  Ronald  Press  Company 


II-9-18 

(3)  Comparison  of  the  normal  cost  of  production  can  be  made  over 

a  series  of  periods  because  idle  time  does  not  affect  the 
burden  rate 

(4)  The  percentage  of  the  supplementary  rate  indicates  the  non- 

utilized  capacity  of  the  shop  and  is  a  measure  of  the 
"waste" 

(5)  Heterogeneous  processes  can  be  carried  on  side  by  side  without 

affecting  costs. 

d.  DEFECTS — 

(1)  Requires  an  elaborate,  intelligent  analysis  of  conditions 

before  the  per  hour  rate  for  each  production  center  can  be 
fixed  in  the  first  instance, 

(2)  Requires  elaborate  records  to  record  the  cost  of  orders  and 

to  gather  the  data  necessary  for  the  readjustment  of 
machine  rates, 

11,  Numerous  modifications  of  the  foregoing  methods  are  in  use. 

REFERENCES : 

Nicholson  &  Rohrbach,  Chapter  ZI 


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II-lO-l 

COMPLETE  ACCOUNTING  COURSE— PART  II 

Lecture  10 

ESTATE  ACCOUNTS 


Problem  22   (For  class  work) 

The  following  is  an  inventory  of  B's  estate  at  his  death  on  August  29,  1919: 

Cash  on  hand  and  in  bank  $  9, 031. 08 

Notes  Receivable  11,035.07 

Mortgage  Loans  (secured  by  Trust  Deeds)  20,500,00 

Accrued  Interest  thereon  1,105.85 

Stocks  at  market  values  at  August  29,  1919  19,502.75 

Bonds   -    •      «   «    n    n    «  35,425.35 

Life  Insurance  Policies  (face  value)  10,000.00 

Loans  to  Sundry  Persons  5,000.00 

Household  Goods  2,000.00 

Bills  Payable  (secured  by  the  above-mentioned  stocks)  15,000.00 

Sundry  Liabilities  5,000.00 

(a)  Prepare  the  opening  entries  for  the  executor's  books. 

(b)  Give  expression  to  the  following  transactions:  legacies  paid,  $7,500; 
bonds  disposed  of,  $34,050;  funeral  expenses,  $1,025;  probate  court  costs, 
$987.50;  attorney's  fees,  $1,000;  accountant 's  fees,  $350. 

(c)  Prepare  a  charge  and  discharge  statement. 

Problem  23 

At  C's  death  on  June  15,  1918,  the  net  value  of  his  estate  was  $300,000  and 
the  executor's  books  opened  on  that  basis. 

During  the  year  ending  June  15,  1919,  the  following  transactions  took  place: 

PAKTiCULARS  INVENTORY  VALUE   REALIZED 

Missouri  Pacific  First  Mortgage  Bonds  $  90,000.00  $  94,000.00 
C.  k  N.  W.  Ry,  Co,  First  Mortgage  Bonds  125,000.00  131,000.00 
Loans  to  Sundry  Persons  39,000.00     24,500.00 

Preferred  Stock  in  the  New  Manufacturing  Co.  35,000.00  40,000.00 
Investment  in  the  firm  of  C  &  D  34,000.00     40,000.00 


$323,000.00   $329,500.00 


Liabilities  estimated  at  $23,000  were  found  to  be  actually  $26,000,  which 
were  paid  on  September  1,  1918. 


Copyright,  1919,  The  Ronald  Press  Company 


II-10-2 

Prepare  the  necessary  journal  and  cash  book  entries  in  respect  of  the  fore- 
going transactions. 

Problem  24 

A  died  on  July  1,  1918,  leaving: 

Cash  on  hand  $    900.00 

Bank  Overdraft  2,250.00 

Life  Insurance  Policy  (on  which  he  has  borrowed 

$1,000,  with  interest  at  5%;  the  loan  was  made 

three  years  ago;  no  interest  has  been  paid)  5,000.00 
Preferred  Stock  in  Wilson  Manufacturing  Co.  100,000.00 
Loan  to  John  Smith  (interest  at  Q%   payable  January  1 

and  July  1.  Interest  paid  to  January  1,  1918)  25,000.00 
First  Mortgage  5%  Bonds  of  the  Western  Lumber  Co., 

interest  payable  March  and  September  1  (bonds  sold 

on  October  1  for  $300,000)  291,000.00 

Sundry  Liabilities  8,000.00 

Funeral  Expenses  900.00 

Accrued  interest  on  Bonds  and  Loans — not  included 

in  above 

Dividend  received  on  the  Wilson  Mfg.  Co.  Preferred 

Stock  10,000.00 

The  net  income  is  payable  to  the  wife. 

The  insurance  policy  was  paid  on  August  1,  1918,  the  amount  of  the  loan  with 
the  accrued  interest  being  deducted  in  the  settlement.  Ail  liabilities  were 
paid,  and  the  income  collected  to  December  31,  1919,  was  paid  to  A's  wife — 
per  terms  of  will. 

Prepare  all  of  the  entries  to  give  expression  to  the  foregoing  transac- 
tions and  set  up  the  necessary  ledger  accounts. 


MISCELLANEOUS  QUESTIONS 

Question  46 — Define  an  "account  current"  and  make  out  such  an  account  for 
A  &  Co.  in  respect  of  the  following  transactions  with  B  &  Co. 

1919 

April   1  Goods  sold  to  B  &  Co.  $  500.00 

May     1  Received  cash  from  B  &  Co.  220.00 

June   15  Goods  purchased  from  B  &  Co.               •  1,250.00 

July    1  Cash  paid  to  B  &  Co.  830.00 

July   15   "    "    n  n  n   M  750.00 

August  1  Goods  purchased  from  B  &  Co.  1,250.00 

August  15    "      "       »   n  II  M  550.00 

The  account  should  be  made  up  as  of  August  31,  1919,  interest  to  be  calcu- 
lated at  the  rate  of  Q%  per  annum  upon  the  basis  of  360  days  to  a  year. 


Copyright,  1919,  The  Ronald  Press  Company 


II-10-3 

Question  47 — In  a  large  manufacturing  company  with  several  factories  and 
tranch  offices,  a  separate  set  of  books  is  carried  at  each  point — being  con- 
trolled, however,  through  the  medium  of  the  general  office  books.  In  the 
balance  sheet  prepared  at  the  end  of  the  year,  the  Net  Branch  Office  Account 
as  shown  on  the  head  office  books  is  incorporated  as  part  of  the  Sundry  Debtors. 
Would  you  consider  it  proper  to  deal  with  the  branch  office  accounts  in  this 
way? 

Question  48 — State  in  the  form  of  journal  entries  on  the  books  of  A  Company 
the  following  transactions: 

(a)  Insurance  collected  by  the  company,  on  account  of  fire,  $76,500 

applying  on  building,  fixtures,  and  merchandise.   The  building 
is  valued  at  $50,000,  fixtures  at  $8,950,  and  merchandise  at 
$30,000 

(b)  Increase  in  value  of  real  estate,  $15,000 

(c)  Instalment  notes  given  by  the  company  for  $40,436.50,  on  purchase 

of  real  estate;  face  of  notes  include  interest  charges  of 
$436.50,  up  to  and  including  maturity  of  notes 

Question  49 — State  briefly  what  information  should  be  submitted  by  the 
executor  to  the  probate  court,  and  the  form  in  which  the  accounts  might  be 
submitted. 

Question  50 — What  is  your  understanding  of  the  following  terms: 

(a)  Capital  surplus 

(b)  Surplus  profits  available  for  dividends 

(c)  Organization  or  preliminary  expenses 


Solution  to  Problem  22 


JOURNAL  ENTRIES 
(1) 


Cash  on  Hand  and  in  Bank  $  9,031.08 

Notes  Receivable  11,035.07 

Mortgage  Loans  20,500,00 

Accrued  Interest  thereon  1,105.85 

Stocks  19,502.75 

Bonds  35,425.35 

Life  Insurance  Policies  10,000.00 

Loans  to  Sundry  Persons  5,000.00 

Household  Goods  2,000.00 

To— Bills  Payable 

Sundry  Liabilities 
Estate  Account 
To  record  inventory  of  estate  of  B  as  filed  in 
Probate  Court  on 

(2) 
Estate  Account  1,375.35 

To — Bonds 
Loss  on  sale  of  bonds. 


$15,000.00 

5,000.00 

93,600.10 


1,375.35 


Copyright,  1919,  The  Ronald  Press  Company 


II-10-4 


SUMMARY  OF  CASH  TRANSACTIONS 


PARTICULARS 


PRINCIPAL  INCOME 


Cash  on  hand  and  in 

bank  Aug.  29,  1919  $  9,031.08 
Proceeds  from  the 

sale  of  bonds      34,050.00 


$43,081.08 


PARTICULARS 
Legacies 

Funeral  Expenses 
Probate  Court  Costs 
Attorney's  Fees 
Accountant's  Fees 
Bills  Payable 
Sundry  Liabilities 
Balance — cash  on  hand 

and  in  bank  at  end 

of  period 


PRINCIPAL  INCOME 

$  7,500.00  

1,025.00  

987.50  • 

1,000.00  

350.00  

15,000.00  

5,000.00  

12,218.58  

$43,081.08  


B'S  ESTATE  CHARGE  AND  DISCHARGE  STATEMENT 
(Date) 


CHARGE 
ESTATE  AT  THE  DEATH  OF  THE  TESTATOR, 
AUG.  29,  1919: 
Cash  $  9,031.08 

Notes  Receivable  11,035.07 

Mortgage  Loans  20,500.00 
Accrued  Interest  thereon    1,105.85 

Stocks  19,502.75 

Bonds  35,425.35 

Life  Insurance  Policies  10,000.00 
Loans  to  Sundry  Persons  5,000.00 
Household  Goods  2,000.00 

$113,600.10 
LESS — Liabilities ; 

Bills  Payable   $15,000.00 

Sundry  Liabilities  5,000.00  20,000.00 


Per  Inventory 


$93,600.10 


$93,600.10 


DISCHARGE 
PAYMENTS  OUT  OF  PRINCIPAL: 
Legacies       $  7,500.00 
Funeral  Expenses  1,025.00 
Probate  Court 

Costs  987.50 

Attorney's  Fees   1,000.00 
Accountant 's  Fee   350.00 


Total  payments  of 


$10,862.50 


LOSS  ON  REALIZATION  OF  BONDS: 
Book  value  $35,425.35  sold 
for  $34,050,  or  a  loss  of    1,375.35 


ESTATE  AT  CLOSE  OF  PERIOD: 
Cash  $12,218.58 

Notes  Receivable  11,035.07 
Mortgage  Loans  20,500.00 
Accrued  Interest  1,105.85 
Stocks  19,502.75 
Life  Ins. 

Policies       10,000.00 
Loans  to  Sundry 

Persons         5,000.00 
Household  Goods   2,000.00 


81,362.25 


$93,600.10 


Copyright,  1919,  The  Ronald  Press  Company 


II-10-5 

Solution  to  Problem  18 

ENTRIES  UPON  BRANCH  OFFICE  BOOKS 

(1) 
Merchandise  Purchased  $11,083.77 

To — Home  Office  Account  §11,083,77 

For  cost  value  of  merchandise  received  during 
the  year  from  the  warehouse, 

(2) 
Freight  on  Purchases  911.03 

To — Home  Office  Account  911.03 

Freight  prepaid  by  home  office  on  materials 
purchased. 

(3) 

Salaries  and  Other  Expenses  7,585.56 

To — Accounts  Payable  7,585.56 

Total  of  salaries  and  other  expenses  during 
the  year  as  per  voucher  record. 

(4) 

Accounts  Payable  6,987.45 

To— Cash  6,987.45 

Total  of  salaries  and  other  expenses  actually 
paid  during  the  year. 

(5) 

Customers'  Accounts  30,811.74 

To — Sales  Account  30,811.74 

Total  sales  during  the  year  as  per  sales 
record  or  journal. 

(6) 

Cash  26,900.41 

To — Customers*  Accounts  *  26,900.41 

Total  of  customers  accounts  collected  during 
the  year  as  per  cash  book, 

(7) 

Proportion  of  Home  Office  Management  Salaries 

and  Expenses  675.00 

To — Home  Office  Account  675.00 

Charge  rendered  by  the  Home  Office  represent- 
ing this  Branch's  proportion  of  the  Home 
Office  salaries  and  expenses  during  the 
year  ended  June  30,  1919. 

Copyright,  1919,  The  Ronald  Press  Company 


II-10-6 


(8) 

Branch  No.  2  (or  the  Home  Office  Account) 
To~Merchandise  Purchased 
Freight  on  Purchases 
Cost  value  (including  freight  charges 

thereon)  of  merchandise  shipped  to  Branch 
No.  2. 


$1,318.11 


;i,220.00 
98.11 


(9) 
Merchandise  Purchased  8,378.11  . 

To — Accounts  Payable  8,378.11 

Merchandise  purchased  direct  by  the  branch 
office,  as  per  voucher  record. 

(10) 
Accounts  Payable  8,378.11 

To— Cash  8,378.11 

Total  of  outside  purchases  of  merchandise 
which  were  paid  for  during  the  year  ending 
June  30,  1919. 

(11) 
Inventory  of  Merchandise  on  hand  at  June  30, 

1919  1,103.27 

To — Trading  Account  1,103.27 

To  take  up  the  inventory  of  materials  on  hand 
at  June  30,  1919. 


Sales  Account 

To — Trading  Account 


CLOSING  ENTRIES 
(1) 

(2) 


Trading  Account 

To — Merchandise  Purchased  Account 
Freight  on  Purchases 


$30,811.74 


19,054.80 


$30,811.74 


18,241.88 
812.92 


(3) 


Trading  Account 

To — Profit  and  Loss  Account 


12,860.21 


12,860.21 


(4) 
Profit  and  Loss  Account 

To — Salaries  and  Other  Expenses 

Proportion  of  Home  Office  Management, 
Salaries,  and  Expenses 


8,260.56 


7,585.56 
675.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-10-7 
(5) 

Profit  and  Loss  Account  $  4,599.65 

To — Home  Office  Account  $  4,599.65 

To  transfer  net  profit  of  branch  to  Home 
Office  Account. 
The  statements  ordinarily  sent  to  the  Home  Office  after  the  Branch  Office 
books  are  closed  are  as  follows: 

BRANCH  OFFICE  LEDGER 
TRIAL  BALANCE  (After  Closing) 
JUNE  30,  1919 
Home  Office  Account  (including  the  charge  of  $1,318.11 

to  Br£inch  No.  2  above  referred  to)  $15,951.34 

Customers*  Accounts  (supported  by  a  detailed  list  showing 

the  status  of  each  account  at  June  30,  1919)  $  3,911.33 

Cash  on  Hand  and  in  Bank  (supported  by  a  statement  showing 

the  composition  of  the  amount)  11,534.85 

Inventory  of  Merchandise  on  Hand  at  June  30,  1919  (sup- 
ported by  a  detailed  inventory  properly  certified  to 
by  the  Manager  and  Bookkeeper  respectively)  1,103.27 

Accounts  Payable  (with  a  detailed  list  of  the  items 

appended  to  the  Trial  Balance)  598.11 


$16,549.45  $16,549.45 


TRADING  AND  PROFIT  AND  LOSS  STATEMENT 
FOR  YEAR  ENDING  JUNE  30.  1919 
TRADING  ACCOUNT 
Purchases  of  Merchandise  Sales  $30,811.74 

during  the  Year  $19,461.88 

Freight  Charges  on  Merchan- 
dise purchased  911.03 


$20,372.91 
LESS — Mdse.  shipped 
to  Branch 

No.  2     $1,318.11 
Inventory  of 
Mdse.  on 
hand  at 
June  30, 
1919       1,103.27   2,421.38 


Cost  of  Goods  Sold         $17,951.53 

Balance — Gross  Profits  car- 
ried to  Profit  and  Loss 
Account  12,860.21 


$30,811.74  $30,811.74 


Copyright,  1919,  The  Ronald  Press  Company 


II-10-8 


PROFIT  AND  LOSS  ACCOUNT 


Salaries  and  Other  Expenses  $  7,585.56 
Proportion  of  Home  Office 

Salaries  and  Expenses  675.00 
Balance — Net  Profits  from 

Trading  for  the  year  ending 

June  30,  1919,  carried  to 

the  Home  Office  Account     4,599.65 


$12,860.21 


Gross  Profit  brought  down 
from  Trading  Account 


$12,860.21 


$12,860.21 


SUMMARY  OF  BRANCH  OFFICE  ACCOUNT  WITH  THE 
HOME  OFFICE 


Merchandise  shipped  to  Branch 

No.  2  $  1,220.00 

Freight  Charges  thereon         98.11 
Balance  as  per  Trial  Balance  15,951.34 


Merchandise  received  from 

Home  Office 
Freight  charges  thereon 
Proportion  of  Home  Office 

Management  Salaries  and 

Expenses 
Balance  of  Profit  and  Loss 

Account  as  per  detailed 


$11,083.77 
911.03 


675.00 


statement  appended  hereto   4,599.65 


$17,269.45 


$17,269.45 


ENTRIES  UPON  HOME  OFFICE  BOOKS 
(1) 


Branch  No.  1  Office  Account 
To — Finished  Product 

Freight  on  Branch  Shipments 
To  record  materials  shipped  to  Branch  No.  1  at 
cost  and  prepaid  freight  thereon. 

(2) 
Branch  No.  1  Office  Account 

To — Management,  Salaries,  and  Expenses 
To  charge  Branch  No.  1  with  proportion  of 
home  office  management  salaries  and 
expenses. 

(3) 
Branch  No.  2  Office  Account 

To — Branch  No.  1  Office  Account 
Materials  shipped  at  cost  from  Branch  No.  1 
•to  Branch  No.  2,  including  freight  charges 
from  home  office  to  Branch  No.  1. 


$11,994.80 


$11,083.77 
911.03 


675.00 


675.00 


1,318.11 


1,318.11 


Copyright,  1919,  The  Ronald  Press  Company 


II-10-9 


(4) 


Branch  No.  1  Office  Account 

To — Branch  No.  1  Profit  and  Loss  Account 
To  take  up  net  profit  of  Branch  No.  1  as  per 
trading  and  profit  and  loss  account  for  the 
year  ending  June  30,  1919. 


$  4,599.65 


$  4,599.65 


Solution  to  Problem  19 


THE  GENERAL  MANUFACTURING  COMPANY 
BALANCE  SHEET,  DECEMBER  31,  1918 


ASSETS 


CURRENT  ASSETS: 
Cash  Accounts 
Accounts  Receivable 
Inventories 
Other  Current  Assets 

DEFERRED  CHARGES: 

Interest,  Insurance,  etc..  Pre- 
paid 
Bond  Discount  not  Amortized 

INVESTMENTS: 

Stocks  of  Other  Companies 
Miscellaneous  Bonds  and  Stocks 
Liberty  Bonds 

SINKING  FUND  FOR  BONDS 

LAND,  BUILDINGS,  MACHINERY,  ETC: 

Land 

Construction  in  Progress 

Buildings 

Office  Furniture  and  Fixtures 

Machinery  and  Equipment 

Delivery  Equipnent 

Other  Fixed  Assets 


LESS — Depreciation  Reserve 
GOOD-WILL 


$248,285.00 

9,966.00 

92,790.00 

19,116.00 

16,380.00 

$386,537.00 
122,620.00 


;  202,615.00 

469,908.00 

1,043,817.00 

46,940.00 


19,644.00 
2,500.00 


120,000.00 

12,250.00 

150,000.00 


84,797.00 
30,158.00 


263,917.00 


,763,280.00 


22,144.00 


282,250.00 
10,000.00 


378,872.00 

350.000.00 

$2,806,546.00 


Copyright,  1919,  The  Ronald  Press  Company 


11-10-10 


LIABILITIES 


CURRENT  LIABILITIES! 
Notes  Payable 
Accounts  Payable 

Accrued  Interest,  Taxes,  and  Wages 
Other  Current  Liabilities 


$  875,000.00 
91,191.00 
9,212.00 
4,550.00  ^   979,953.00 


BONDS  ISSUED  AND  OUTSTANDING 
CONTINGENT  RESERVE 
NET  WORTH: 

Capital  Stock,  10,000  shares  par 

value  $100  each  $1,000,000.00 

Surplus  at  January  1,  1918       $210,500.00 
Profits,  Year  Ending  December  31, 

1918  66,093.00 


500,000.00 
75,000.00 


LESS — Dividends  Paid 


$276,593.00 
25,000.00 


251,593.00   1,251,593.00 


!, 806, 546. 00 


Copyright,  1919,  The  Ronald  Press  Company 


II-lO-ll 


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Copyright,  1919,  The  Ronald  Press  Company 


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11-10-12 

MEMORANDUM  JOURNAL  ENTRIES 

(1) 
Cash  $100,000.00 

Inventories  29,195.00 

Plant  Home  Office  Account  227,555.00 

To — Home  Office  Account  $356,750.00 

Eliminating  Plant  current  account  and  plac- 
ing on  working  sheet  difference  in  cash  and 
inventories.   (Reconciliation  shows  cash 
and  goods  in  transit,  as  above.) 

(2) 

Accounts  Receivable  84,000.00 

Inventories  11,085.00 

Home  Office  Account  on  Branch  Books  116,315,00 

To — Branch  Accounts  on  Home  Office  Books  135,800.00 

Eliminating  the  branch  inter-office  accounts, 

ANSWERS  TO  QUESTIONS 

Answer  to  Question  36 — In  order  to  meet  the  requirements  of  the  management 
and  record  the  profit  or  loss  from  the  operation  of  each  department,  an  account- 
ing system  somewhat  along  the  following  lines  might  be  adopted: 

1.  GENERAL  SALES  ACCOUNT — The  total  sales  as  recorded  in  the  sales  record 
should  be  posted  to  the  credit  of  a  Sales  Account  to  be  kept  in  the  general 
ledger,  and  the  distribution  of  the  sales  by  departments  should  be  made  in  a 
subsidiary  or  analysis  record.   The  total  of  the  departmental  sales  accounts 
as  shown  by  the  latter  record  should  agree  with  the  balance  called  for  by  the 
Sales  Account ;  hence  it  follows  that  the  latter  operates  as  a  controlling 
account. 

2.  GENERAL  COST  OF  GOODS  SOLD  ACCOUNT— The  total  cost  of  goods  sold  should 
be  posted  to  the  debit  of  a  "Cost  of  Goods  Sold  Account"  to  be  opened  in  the 
general  ledger.   The  distribution  according  to  departments  should  be  made 
through  the  medium  of  a  subsidiary  record.  The  total  of  the  cost  of  goods  sold 
by  all  departments  should  agree  with  the  balance  called  for  by  the  general  ledger 
controlling  account. 

3.  DEPARTMENTAL  EXPENSE  ACCOUNT — The  total  expenses  of  each  department 
should  be  carried  to  appropriate  departmental  expense  controlling  accounts 
opened  for  each  department  in  the  general  ledger  in  order  to  receive  the  charges 
coming  from  the  various  books  of  original  entry.  The  analysis  or  distribution 
of  the  departmental  expenses  can  be  accomplished  through  the  introduction  of 
an  abstract  or  analysis  record,  the  total  of  the  expenses  as  distributed  in  that 
record  agreeing  with  the  amount  shown  in  the  general  ledger. 

The  difference  between  the  proceeds  from  sales  (recorded  in  total  in  the 
General  Sales  Account)  and  the  cost  of  goods  sold  (summarized  in  the  General 
Cost  of  Goods  Sold  Account)  would  represent  the  gross  profit  on  the  business 

Copyright,  1919,  The  Ronald  Press  Company 


11-10-13 

done.  From  the  latter  amount  should  be  deducted  the  departmental  expenses,  the 
balance  representing  the  departmental  profits  which  are  carried  to  the  General 
Profit  and  Loss  Account,  in  which  account  the  general  management  expenses, 
miscellaneous  income,  and  net  profits  from  operation  are  shown.   The  follow- 
ing is  an  illustration  of  the  manner  in  which  the  statement  of  profits  may  be 
prepared: 

STATEMENT  OF  PROFITS  AND  INCOME 
MONTH  OF  

DEPARTMENTAL  PROFIT  AND  LOSS  ACCOUNT 


PARTICULARS 
Sales 
DEDUCT — Cost  of  Goods  Sold 

BALANCE — Gross  Profits 

DEPARTMENTAL  EXPENSES: 
Salaries 
Rent 

Telephone  and  Telegraph 
Stationery  and  Printing 
Traveling  Expenses 
Commissions 
Miscellaneous  Expenses 


DEPT.  A      DEPT.  B      DEPT.  C     TOGETHER 
$110,000.00   $125,000,00  $75,000.00  $310,000.00 
80,000.00     93,000.00   60,000.00   233,000.00 


8,000.00 
1,000.00 
500.00 
500.00 
3,000.00 
1,000.00 
1,000.00 


$  30,000.00   $  32,000.00  $15,000.00  $  77,000.00 


9,000.00 
1,000.00 
750.00 
250.00 
4,000.00 
500.00 
500.00 


4,000.00 
500.00 
250.00 
250.00 

2,500.00 
500.00 

1,000.00 


21,000.00 
2,500.00 
1,500.00 
1,000.00 
9,500.00 
2,000.00 
2,500.00 


TOTAL  Departmental  Expense  $  15,000.00   $  16,000.00  $  9,000.00  $  40,000.00 


Departmental  Profits  carried 
to  General  Profit  and 
Loss  Account 


$  15,000.00   $  16,000.00  $  6,000.00  $  37,000.00 


GENERAL  PROFIT  AND  LOSS  ACCOUNT 


Management  Salaries 
General  Office  Salaries 

and  other  expenses 
Interest  on  Bank  Loans 


Surplus  Net  Profits  carried 
to  Surplus  Account 


$10,000.00  Departmental  Profits  brought  down: 


7,500.00 
8,200.00 

$25,700.00 

13.200.00 


$38,900.00 


$15,000.00 

16,000.00 

6,000.00 


Interest  received  on 
Bank  deposits,  etc. 
Rents  Collected  (net) 


$37,000.00 


700.00 
1,200.00 

$38,900.00 


Copyright,  1919,  The  Ronald  Press  Company 


11-10-14 

Answer  to  Question  37 — The  payments  of  $11,037.27  for  real  estate,  per- 
sonal property,  and  corporation  taxes  for  the  year  1918  should  be  charged 
against  the  "Accrued  Taxes  Account,"  and  any  difference  between  the  actual 
amount  of  the  taxes  paid  and  the  provisions  accrued  in  respect  thereof  should 
be  adjusted  by  a  credit  or  debit  to  the  Accrued  Taxes  Account  as  the  case  may 
be  and  in  many  cases  per  contra,  debited  or  credited  to  Taxes  Account  (a  sub 
profit  and  loss  account). 

Answer  to  Question  38 — 

(a)  Cash  dividends  represent  the  dividends  declared  by  the  board  of 
directors  and  paid  to  the  stockholders  in  cash. 

(b)  Bonuses  to  officers  generally  represent  additional  compensation  as  a 
reward  for  bringing  about  a  "good  showing"  for  the  period.   They  are  most 
frequently  paid  in  cash,  although  in  some  instances  they  are  paid  in  stock, 

(c)  Stock  dividends  represent  the  dividends  declared  by  the  board  of 
directors  and  paid  to  the  stockholders  in  stock.   They  may  be  payable  in  pre- 
ferred stock  or  common  stock,  depending  on  the  terms  of  the  resolution  adopted 
by  the  directors. 

(d)  Cash  or  stock  dividends  must  be  declared  by  the  board  of  directors. 
When  declared,  they  become  a  liability  of  the  corporation  payable  at  the  dates 
specified  in  the  resolution.   Consequently  they  should  be  recorded  on  the  books 
notwithstanding  that  the  date  of  payment  may  be  subsequent  to  the  end  of  the 
current  fiscal  period, 

(e)  Entries  to  be  made  are: 

CASH  DIVIDEND 
(1) 


Surplus  $- 
To — Dividends  Payable 
Dividend  #8  payable declared  by  resolu- 
tion of  board  of  directors  adopted 

See  page.... of  minute  book. 

(2) 
Dividends  Payable 

To — Audited  Vouchers 

(3) 

Audited  Vouchers 
To — Cash 

STOCK  DIVIDEND 

(1) 
Surplus  $- 

To — Dividends  Payable 

To  record  stock  dividend  #1  payable declared 

by  resolution  of  board  of  directors  adopted „ 

See  minute  book  page.... 

Copyright,  1919,  The  Ronald  Press  Company 


11-10-15 


(2) 

Dividends  Payable 

To — Capital  Stock 
To  record  issuance  of  stock  certificates  in 
payment  of  stock  dividend  #1. 


Bonus  to  Officers 

To — Audited  Vouchers 

Audited  Vouchers 
To — Cash 

Profit  and  Loss 

To — Bonus  to  Officers 


BONUS  TO  OFFICERS 
(1) 

(2) 


(3) 


Answer  to  Question  59— 

Preferred  stock  dividends  in  arrears  are  not  a  liability  of  the  corpora- 
tion and  hence  should  not  be  stated  as  such.   The  better  practice  is  to  refer 
to  them  in  a  footnote  to  the  balance  sheet,  as  the  information  is  essential  in 
order  to  show  the  position  of  the  common  stock. 


Answer  to  Question  40— 

(a)  Unpaid  Subscriptions  to  Capital  Stock  may  be  shown  as  a  deduction  from 
the  capital  stock  issued  and  outstanding  or  it  may  be  shown  as  Unpaid  Subscrip- 
tions.  In  the  latter  case  the  asset  is  stated  between  the  Capital  and  Current 
Assets.   If  the  amount  involved  is  small  and  will  be  paid  in  shortly  it  may 

be  proper  to  include  same  among  the  current  assets, 

(b)  Unissued  Capital  Stock  is  non-existent  and  consequently  must  be 
deducted  from  the  nominal  issue  in  order  to  show  the  Capital  Stock  Issued  and 
Outstanding.   Two  forms  may  be  followed,  viz.  : 


(1) 


Capital  Stock  Authorized: 

1,000  shares  par  value  (100. 00 

Issued  and  Outstanding 

Capital  Stock  Authorized: 

1,000  shares  par  value  $100.00 
Less — Unissued 

Issued  and  Outstanding 


$100,000.00 


$80,000.00 


(2) 


$100,000.00 
20,000.00 


580,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


11-10-16 

(c)  Dividends  declared  and  unpaid  represent  a  liability  of  the  corpora- 
tion to  the  stockholders  to  be  paid  at  the  date  specified  in  the  resolution 
declaring  the  dividend.  Cash  dividends  are  part  of  the  current  liabilities 
and  should  be  so  shown  on  the  balance  sheet.  Stock  dividends  are  shown  im- 
mediately following  the  current  liabilities,  since  their  payment  will  not  af- 
fect the  working  capital.  It  is  generally  considered  the  better  practice  to 
state  on  the  balance  sheet  the  date  of  payment. 


ESTATE  ACCOUNTING 

The  term  "fiduciary  accounting"  applies  most  often  to  the  accounting  for  the 
estates  of  deceased  persons,  although  the  term  is  also  used  in  connection  with 
various  kinds  of  trusts  and  funds  arising  in  the  course  of  ordinary  business 
procedure. 

In  estate  accounting  the  chief  difficulties  center  about  the  question, 
"What  is  income?"   This  question  has  never  been  satisfactorily  settled,  its 
answer  having  been  given  in  numerous  conflicting  decisions  of  state  courts. 
In  practice,  when  the  question  arises,  a  ruling  from  the  probate  (or  surrogate) 
court  is  obtained  and  followed,  regardless  of  the  correctness  of  the  account- 
ing theory  involved. 

The  will  of  a  deceased  person  names  one  or  more  executors,  and  in  case  the 
estate  is  not  to  be  divided  at  once,  one  or  more  trustees.  An  administrator 
is  appointed  by  the  probate  court  should  no  will  be  found.  Their  duties  are 
defined  by  the  will  or  by  the  court.   The  first  step  is  to  file  an  inventory  of 
the  estate  based  usually  on  market  values  at  date  of  death.   Securities  and 
other  properties  may  be  appraised  if  their  value  is  not  otherwise  obtainable. 
The  values  thus  ascertained,  together  with  the  liabilities  at  date  of  death, 
form  the  opening  entry  for  the  executor's  books,  the  net  amount  being 
credited  to  "Estate  Account."  The  Estate  Account  is  a  capital  account  and  will 
be  credited  and  debited  for  any  increases  or  decreases  in  capital. 

Principal  or  Corpus  consists  of  the  net  estate  left  by  the  testator  and 
includes  all  accruals  up  to  and  including  the  date  of  death.  The  property  left 
by  the  testator,  not  the  value  placed  thereon  for  probate  purposes,  is  the 
essential  point.   Consequently,  when  realized,  any  excess  or  deficiency  between 
the  sale  price  and  the  probated  value  is  principal,  not  income. 

Income  consists  of  the  revenue  obtained  from  the  principal  and  accruing 
after  the  testator's  death.   It  differs  from  the  term  "prof its,"  as  the  latter  is 
ordinarily  understood,  in  that  the  profit  or  loss  arising  from  the  realization 
of  the  assets  comprising  the  principal  remains  principal,  and  no  part  thereof 
becomes  income.   Furthermore,  the  interest  collected  on  a  bond  is  income  al- 
though the  bond  itself  is  sold  at  a  loss,  such  loss  being  chargeable  to  the 
principal. 

The  more  common  items  are  classified  as  follows: 

1.  Accrued  items  (taxes,  interest,  etc.)  are  usually  computed  to  the 
date  of  death  as  a  part  of  or  deduction  from  principal,  and 
thereafter  as  an  addition  to  or  subtraction  from  income.  Prac- 
tice varies  considerably,  but  there  would  seem  to  be  no  doubt  of 
the  best  accounting  procedure. 

Copyright,  1919,  The  Ronald  Press  Company 


11-10-17 

2.  Cash  dividends  declared  before  and  paid  after  death  are  in  most  cases 

considered  part  of  principal. 

3.  Stock  dividends  declared  before  or  after  death  are  generally  re- 

garded as  principal. 

4.  Premiums  and  discounts  on  bonds.   If  discounts  are  amortized  over 

the  life  of  the  bonds,  income  will  be  credited  each  year  with  a 
certain  portion  thereof.   The  amortization  of  premiums  would  re- 
quire the  setting  aside  from  income  a  specified  sum  each  year.  In 
some  jurisdictions  the  question  is  avoided  by  neglecting  any 
provision  for  discount  or  premium. 

Items  not  subject  to  dispute  which  are  charged  or  credited  to  principal, 
are: 

1.  Additional  liabilities  of  testator  incurred  prior  to  date  of  death 

2.  Losses  or  profits  on  sale  of  real  and  personal  property 

3.  Funeral  expenses 

4.  Expenses  of  probating,  etc. 

5.  Legacies 

Items  charged  or  credited  to  income  are: 

1.  Cash  dividends  declared  after  death 

2.  Bond  and  other  interest  accruing  after  date  of  death 

3.  Current  estate  expenses  (auditing,  legal,  etc.) 

4.  Repairs  and  maintenance 

5.  Provision  for  depreciation,  depletion,  etc.,  except  where  the  will 

indicates  an  intention  to  pass  the  income  without  first  providing 
for  depreciation  or  depletion  of  the  corpus. 

LIFE  TENANT  or  INCO^'[E  BENEFICIARY— person  who  is  entitled  to  receive  the 
income  from  the  estate. 

REMAINDERMAN — person  to  whom  the  corpus  passes. 

LEGATEE — person  who  receives  something  specifically  willed  to  him  by  the 
testator,  provided  the  testator  still  owns  that  thing.  For  instance,  if  a 
specific  security  is  willed  but  has  been  disposed  of  prior  to  the  testator's 
death,  the  legacy  lapses ;  the  equivalent  value  does  not  pass. 

ADVANCE — If  the  testator  has  made  a  gift  with  the  intention  that  the 
amount  thereof  shall  be  deducted  from  the  receiver's  share  in  the  estate,  such 
gift  is  termed  an  advance.   It  is  added  back  for  the  purpose  of  determining 
the  total  estate  and  deducted  from  the  receiver's  share  therein.  Should  the 
advance  exceed  the  receiver's  share,  it  is  not  added  back  to  the  estate  which 
would  then  be  divided  among  the  others.   The  interest  of  the  party  to  whom  the 
advance  had  been  made  would  cease,  but  no  refund  need  be  made. 

At  the  end  of  the  first  year  or  sooner,  as  directed  by  the  court,  the 
executor  submits  a  report  of  his  administration  to  the  court  showing  the  dis- 
position of  various  assets,  the  acquisition  of  others,  and  in  general  the 
course  of  funds  through  his  hands.  One  form  of  statement~the  statement  of 
charge  and  discharge — is  outlined  below: 

Copyright,  1919,  The  Ronald  Press  Company 


11-10-18 


ESTATE  OF  WILLIAM  ROE 

STATEMENT  OF  FINAL  ACCOUNTING 

BY  JOHN  DOE,  EXECUTOR 


I  CHARGE  MYSELF  WITH: 


I  CREDIT  MYSELF  WITH: 


AS  TO  PRINCIPAL: 

Assets  as  per  Appraisal: 
Cash 
Debtors 
Mortgages 
Bonds 
Corporation  Stocks 

Assets  Discovered  after 
Appraisal : 
Insurance  Policies 
Real  Estate 


Increase  in  Value  of  Assets  Sold: 

Stock  $ 

Bonds  ■ 


AS  TO  PRINCIPAL: 

Liabilities  Liquidated: 
Debts  Paid 
Bank  Loan  Paid 


Expenses  chargeable  to  Principal; 

Funeral  Expenses       $ 

Probate  Charges 

Legal  Expenses         

Executor's  Commission   


Decrease  in  Value  of  Assets  Soldi 

Mortgages  $ 

Stocks 

Real  Estate 


Balance  of  Principal: 
Cash 
Bonds 


AS  TO  INCOME: 

Income  Collected: 
Rent 

Interest  on  Bonds 
Interest  on  Notes 
Dividends  on  Stock 


AS  TO  INCOME: 

Expenses  Chargeable  to  Income: 

Repairs  to  Real  Estate  $ 

Taxes  on  Real  Estate    

Executor's  Commission   


Balance  of  Income 


BALANCE  OF  ESTATE  CARRIED  FORWARD: 

Principal  $ 

Income  S 


LEGACY  PAID  GEORGE  ROE 

DISTRIBUTION: 

1/3  to  widow  J 

1/2  to  George,  son 

1/6  to  Arabella,  daughter 


Copyright,  1919,  The  Ronald  Press  Company 


11-10-19 

It  will  be  noted  that  the  statement  divides  itself  into  two  parts,  the 
first  including  the  transactions  up  to  the  point  of  distributing  the  legacies, 
and  the  balance  of  the  estate.   The  second  part  shows  the  distribution  as 
between  the  legatees  and  heirs.   Should  the  statement  be  prepared  before  the 
final  distribution,  the  last  section  will,  of  course,  be  omitted  and  any  pay- 
ments of  legacies  shown  under  principal  credits  above.  Liabilities  at  date  of 
death  may  be  deducted  from  the  total  of  assets  originally  charged  in  order  that 
the  net  inventory  figure  may  appear  on  the  statement. 

The  books  of  an  executor  or  trustee  are  usually  very  simple,  the  only 
variation  from  standard  practice  arising  in  case  of  the  cash  book  which  may 
be  provided  with  two  money  columns,  one  for  principal  and  the  other  for  income. 
In  this  way  the  balances  of  principal  and  income  cash  on  hand  may  be  ascer- 
tained, although  both  may  be  kept  in  the  same  bank  account. 

REFERENCES: 

Howes,  Income  and  Principal 

Hardcastle,  Accounts  of  Executors  and  Trustees 


Copyright,  1919,  The  Ronald  Press  Company 


II-ll-l 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  11 
BALANCE  SHEET  CONSTRUCTION 


Problem  25 

A  corporation  known  as  the  A  B  Mfg.  Co.  purchased  a  plant  and  commenced 
manufacturing  a  bulk  product  on  January  1,  1918.   The  following  trial  balance 
was  abstracted  from  the  books  at  January  31,  1918, 


Real  Estate 

Buildings 

Machinery 

Customers*  Accounts 

Accounts  Payable 

Bank  Account 

Shop  Expenses 

Heat  and  Power 

Insurance  Premiums  (policies  cover  the  period 

of  3  years  from  January  1,  1918) 
Sales 
Labor 
Supplies 

Raw  Materials  purchased 
Office  Furniture  and  Fixtures 
Discount  on  Sales 
Office  and  Management  Salaries 
Freight  on  Sales 
Interest  on  Notes  Payable  (covering  period 

from  January  1  to  March  31,  1918) 
Notes  Payable 
Capital  Stock 
First  6%  Bonds 
General  Expenses 


DEBITS 

67,200.00 
481,215.00 
211,380.00 
109,500.00 

44,370.00 
4,395.00 
3,360.00 

7,035.00 

33.735.00 

11,460.00 

168,675.00 

3,750.00 

630.00 

3,900.00 

705.00 

900.00 


1,800.00 


credit: 


$   66,960.00 


127,050.00 


60,000.00 
600,000.00 
300,000.00 


$1,154,010.00  $1,154,010.00 


Copyright,  1919,  The  Ronald  Press  Company 


H-11-2 

Prepare  the  following: 

(a)  Statement  showing  cost  of  product  manufactured  and  average  cost 

"per  pound" — 12,000,000  pounds  being  produced 

(b)  Finished  product  account — (7,000,000  pounds  on  hand  at  January- 

Si,  1918) 

(c)  Statement  of  profit  and  loss  account  for  month  of  January,  1918 

(d)  Balance  sheet  as  at  January  31,  1918. 

No  entries  were  made  in  the  books  in  respect  of  the  following  items: 

1.  Raw  materials  used — per  storekeeper's  distribution  reports, 

$121,095 

2.  Accrued  wages  January  31,  1918,  $4,500 

3.  Estimated  freight  allowances  to  customers  at  January  31,  1918, 

equivalent  to  approximately  5%  of  the  total  uncollected  accounts 
at  that  date 

4.  Estimated  allowances  to  be  made  on  account  of  cash  discounts, 

$1,750 

5.  Accrued  bond  interest  for  the  month  of  January 

6.  Depreciation  for  the  month  of  January  at  the  following  annual  rates: 

(a)  Buildings,  2  1/2% 

(b)  Machinery,  7  1/2% 

(c)  Furniture  and  Fixtures,  10% 

7.  The  storekeeper  reports  the  following  issues  during  the  month: 

(a)  Factory  office  supplies ,  $735 

(b)  Shop  supplies,  $7,080 

Problem  26 

From  the  following  trial  balances  and  additional  data  taken  after  the  closing 
of  the  books  of  The  Chicago  Cottage  Construction  Company,  prepare  a  balance  sheet 
in  proper  form,  making  whatever  adjustments  therein  you  think  necessary,  and 
submit  also  the  adjustments  you  would  make  on  the  books. 


Copyright,  1919,  The  Ronald  Press  Company 


II-11-3 


TRIAL  BALANCE  AFTER  CLOSING,  DECEMBER  31,  1918 


Cash  (Banks)  $  45,000,00 

Buildings,  Land,  Machinery,  Tools,  and  Office 

Supplies  422,000.00 

Patents,  Copyrigirits,  Trade  Secrets,  and  Good-Will    125,000,00 
First  Mortgage,  20-year,  6%  Bonds  $  200,000,00 

Bills  Payable  100,000.00 

Patterns,  Molds,  Drawings,  etc.  30,000.00 

Inventories: 

Raw  Materials  20,000.00 

Work  in  Progress  40,000.00 

Completed  Cottages  15,000,00 

Accounts  Receivable  230,000.00 

Prepaid  Insurance  and  Advertising  1,050.00 

Bills  Receivable  60,100.00 

Furniture  and  Fixtures  4,700.00 

Leaseholds  1,000,00 

Accounts  Payable  89,123,47 

Reserve  for  Depreciation  55,250.00 

Reserve  for  Bad  Debts  13,000.00 

Claims  Against  Transportation  Companies  3,792.00 

Houses  and  Land  for  Employees  46,600,00 

Unissued  Stock,  Common  10,000,00 

Investment  of  Sinking  Fund  18,107,08 

Prepaid  Commissions  8,140,00 

Illinois  Company  Preferred  Stock  (100  shares)  7,580.00 

Reserve  for  Pending  Lawsuits  20,000.00 

Prepaid  Interest  500.00 

Treasury  Stock,  Preferred  30,000.00 

Bond  Sinking  Fund  Reserve  18,107.08 

Dividends  Payable  10,000.00 

Sundry  Debtors  21,378.34 

Cash  (deposited  with  Fiscal  Agent)  2,450.00 

Deposits  on  Bids  12,500.00 

Liberty  Bonds  60,000.00 

Accrued  Taxes  976.00 

Reserve  for  Fire  Losses  25,000.00 

Common  Stock  200,000.00 

Preferred  Stock  200,000.00 

Surplus  283,440.87 


$1,214,897.42  $1,214,897.42 


Copyright,  1919,  The  Ronald  Press  Company 


II-11-4 

From  an  analysis  of  the  accounts  and  supplementary  data,  it  is  found  that; 
the  buildings  are  valued  at  $200,000;  land,  $60,000;  machinery,  $140,000; 
tools,  $21,000;  office  supplies,  $1,000.   The  raw  material  inventory  of 
$20,000  includes  goods  invoiced  but  not  yet  received,  amounting  to  $1,000,  for 
which  no  liability  has  been  set  up.   In  a  report  from  the  chief  engineer,  it 
is  found  that,  among  other  items,  $12,000  worth  of  prepared  shingles  had  been 
charged  directly  to  production,  although  of  this  total,  $8,000  is  still  on 
hand  and  is  not  included  in  the  inventory. 

The  company  was  offered  by  the  local  commercial  association,  and  accepted 
on  December  15,  1918,  a  piece  of  land  to  be  used  as  additional  plant  site,  valued 
at  $20,000.   The  transaction  has  not  yet  been  placed  on  the  books,  inasmuch  as 
the  land  is  regarded  as  a  gift. 

Of  the  accounts  receivable,  $10,000  represent  goods  out  on  consignment. 
Of  the  bills  receivable,  $20,000  consist  of  notes  that  have  been  pledged  as  a 
guaranty  on  contracts  under  way. 

Included  in  the  accounts  payable  of  $89,123.47  is  a  bank  loan  for  $10,000. 
It  was  also  ascertained  that  one  of  the  claims  against  transportation  companies, 
totaling  $1,200,  has  been  lost. 

The  20-year  leasehold  right  appears  on  the  books  at  the  figure  paid  for  it 
on  January  1,  1916. 

Included  in  sundry  debtors  is  an  item  of  $5,500,  representing  a  loan  made 
to  the  president. 


MISCELLANEOUS  QUESTIONS 
Question  51 — 

(a)  What  are  the  two  general  classes  of  overhead  expenses? 

(b)  To  which  one  of  these  two  general  classes  do  the  following  accounts 

of  a  manufacturing  company  belong: 

1.  Purchasing  department  expenses 

2.  Bad  debts  written  off 

3.  Directors'  fees 

4.  Credit  department  expenses 

5.  Federal  corporation  tax 

6.  District  office  expenses 

7.  Fire  and  liability  insurance 

8.  Storekeeping  and  receiving  expenses 

9.  Wages  paid  factory  employees  while  absent  on  account  of 

illness 

10.  Auditing  expenses 

11.  Defective  work 

12.  Sample  expense 


Copyright,  1919,  The  Ronald  Press  Company 


II-11-5 

Question  52 — What  entries  are  required  to  record  the  following: 

(a)  Equipment  dismantled — estimated  original  cost,  $9,047.50 

(b)  Proceeds  from  sale  of  scrap  recovered,  $783.47 

Question  53 — How  would  the  following  bookkeeping  errors,  if  not  adjusted, 
affect  a  balance  sheet  at  the  end  of  a  fiscal  year  with  the  relative  statement 
of  profits: 

(a)  A  charge  of  $3,101.73  to  the  plant  and  machinery  in  respect  of 

repairs  to  certain  equipment — the  charge  was  made  in  July,  1918, 
and  depreciation  was  written  off  at  December  31,  1918,  at  the 
rate  of  10%  per  annum  on  the  ledger  balances  at  the  latter  date. 

(b)  Overvaluation  of  $12,093.76  in  the  inventory  of  raw  materials  and 

supplies  at  the  end  of  the  year  and  an  undervaluation  of 
$9,371.22  in  the  inventory  at  the  beginning  of  the  year. 

Question  54 — How  should  the  following  items  be  dealt  with,  if  at  all,  in 
the  accounts  of  a  company  closing  its  books  on  December  31,  1918: 

(a)  Liabilities  of  $13,093.22  relating  to  the  period  prior  to  December 

31,  1918,  and  not  taken  up  on  the  books  until  January,  1919. 
The  entire  amount  representing  charges  in  respect  of  legal  fees, 
stationery  and  printing,  telegraph  and  telephone,  and  other 
current  running  expenses. 

(b)  The  inventory  at  December  31,  1918,  amounted  to,  at  cost, 

$439,183.27,  and  at  market,  $398,111.14 — taken  up  in  the  books 
at  cost. 

(c)  Investments  in  other  companies  at  cost  $168,037.11;  at  market 

$197,093.27 — taken  up  in  the  books  at  market. 

Prepare  the  necessary  journal  entries  in  respect  of  the  items  that  you 
think  require  adjustment.  What  is  the  effect  on  the  balance  sheet? 

Question  55 — How  would  you  distribute  the  following  expenditures  in  the 
case  of  a  manufacturing  concern: 

(a)  Charges  totaling  $1,491.14  in  connection  with  the  relining  of 

copper  boiling  kettles.   The  kettles  require  to  be  relined  at 
intervals  of  approximately  six  months.   The  original  cost  of  the 
kettles  was  $40,000. 

(b)  The  blacksmith  shop  was  extended  at  a  total  cost  of  $13,804.93  in 

order  to  effect  a  saving  in  the  cost  of  and  to  increase  the  pro- 
duction.  In  doing  this  work  it  was  necessary  to  tear  down  the 
wall  of  the  existing  building  at  the  point  from  which  the 
building  was  extended.   Do  you  consider  that  any  cognizance  need 
be  taken  of  this  loss  in  value  arising  from  the  tearing  down  of 
the  wall?  If  so,  why? 


Copyright,  1919,  The  Ronald  Press  Company 


II-11-6 


Solution  to  Problem  20 


Ihe  general  factory  expenses  consist  of  the  following: 


PARTICULARS 
Superintendent ' s  Salary 
Foremen's  Salaries 
Factory  Office  Salaries 
Telegraph  and  Telephone 
Stationery  and  Printing 

Or  a  TOTAL  of 


AMOUNT 

$6,000.00 

8,950.00 

4,780.00 

308.92 

989.32 

$21,028.24 


Which  should  be  distributed  over  the  various  departments  as  follows: 


DEPARTMENT 

A 
B 
C 

PRODUCTIVE  LABOR 

Per  Cent 
Amount   to  Total 
$  93,107.32   31.82 
101,391.42   34.65 
98,103.12   33.53 

$292,601.86 

100.00 

DISTRIBUTION  OF  FACTORY  EXPENSES 
Per  Cent 
Amount  to  Total 
$  6,691.28   31.82 
7,286.64   34.65 
7,050.32   33.53 


$21,028.24  100.00 


SUMMARY  OF  DEPARTMENTAL  FACTORY  BURDEN  OR  OVERHEAD 
AND  PERCENTAGE  TO  THE  PRODUCTIVE  LABOR 


PARTICULARS  DEPT.  A 

Productive  Labor  $93,107.32 

Departmental  Factory  Expenses: 


DEPT.  B 
$101,391.42 


DEPT.  C 
$98,103.12 


TOGETHER 
$292,601.86 


Wages  of  Unskilled  Workmen  $20,013.11   $  18,073.27  $14,091.34  $  52,177.72 


Light 

Depreciation 

Repairs  and  Renewals 

Taxes 

Oil  and  Waste 

Power  Expenses 

General  Factory  Expense 

Together 

Per  Cent  to  Productive  Labor 


1,078.27 
3,989.23 
4,098.28 
1,100.00 
989.50 
2,138.17 
6,691.28 


43.07 


1,303.05 
4,809.32 
9,081.78 
1,400.00 
1,208.43 
3,289.42 
7,286.64 


1,811.32 
8,073.11 
10,108.33 
1,800.00 
1,383.11 
3,033.11 
7,050.32 


4,192.64 

16,871.66 

23,288.39 

4,300.00 

3,581.04 

8,460.70 

21,028.24 


$40,097.84   $  46,451.91  $47,350.64  $133,900.39 


45.81 


48.27 


45.76 


Copyright,  1919,  The  Ronald  Press  Company 


Solution  to  Problem  21 


II-11-7 


Exhibit  A 


(a) 

A  B  AND  C— JOINT  VENTURE  IN 

ROYAL  AND  ARCADIA  OIL  WELLS 

STATEMENT  OF  PROFIT  AND  LOSS 

YEAR  ENDING  DECEMBER  31,  1918 


PARTICULARS 


SALES 


LESS— COST  OF  SALES: 
Operating  Expenses 
Manager's  Salary- 
Proportion  Leasehold  Cost 
Depreciation 

Total  Cost 
Less — Inventory,  Dec.  31,  1918 

Cost  of  Sales 

GROSS  PROFIT  FROM  OPERATIONS 

LESS— INTEREST  CHARGES  AND  CREDITS: 
Interest  on  Mortgage  (A  and  B) 
Interest  on  Lease  Payment  (C) 
Interest  on  Legal  Fees  (C) 
Interest  on  Construction  (C) 
Interest  on  Expenses       (C) 

Total  Interest  Charges 
Interest  on  Cash  from  Sales  (C) 

Net  Interest  Charges 

NET  PROFIT  PROM  OPERATION 


ROYAL      ARCADIA      TOGETHER 
$96,500.00  $120,600.00  $217,100.00 


$15,250.00  $  11,600.00  $  26,850.00 

4,000.00  2,000.00  6,000.00 

2,635.42  1,715.00  4,350.42 

479.17  455.00  934.17 


$22,364.59  $  15,770.00  $  38,134.59 
1,500.00     4,400.00     5,900.00 


$20,864.59  $  11,370.00  $  32,234.59 


$75,635.41  $109,230.00  $184,865.41 


$  2,460.00  $    600.00  $  3,060.00 

1,260.00  1,380.00  2,640.00 

62.50  65.00  127.50 

375.00  303.00  678.00 

381.25  290.00  671.25 


$  4,538.75  $  2,638.00  $  7,176.75 
750.00       880.00     1,630.00 


$  3,788.75  $   1,758.00  $  5,546.75 


$71,846.66  $107,472.00  $179,318.66 


Copyright,  1919,  The  Ronald  Press  Company 


II-11-8 


Exhibit  B 


(b) 

A  B  AND  C— JOINT  VENTURE  IN 
ROYAL  AND  ARCADIA  WELLS 
BALANCE  SHEET  DECEMBER  31,  1918 


ASSETS 


CURRENT  ASSETS: 
Oil  on  hand 
Customers'  Accounts 

Total  Current  Assets 

LEASEHOLDS 

LAND  IMPROVEMENTS  AND  CONSTRUCTION 
LESS — Reserve  for  Depreciation 

Total  Capital  Assets 

Total  All  Assets 


ROYAL 


ARCADIA 


%   1,500.00  $  4,400.00 
21,500.00   32,600.00 


TOGETHER 

$  5,900.00 
54,100.00 


$23,000.00  $37,000.00  $  60,000.00 


$60,614.58  $32,585.00  $  93,199.58 


$12,500.00  $10,100.00 
479.17      455.00 


$  22,600.00 
934.17 


$12,020.83  $  9,645.00  $  21,665.83 


$95,635.41  $79,230.00  $174,865.41 


LIABILITIES 


ACCOUNTS  CURRENT  WITH  PARTNERS: 
A 
B 


Less — Balance  in  C's  account 


$107,232.89 
72,372.89 

$179,605.78 

4,740.37  $174,865.41 


NOTES— 

1.  C's  account  current  is  deducted  from  the  total  of  A's  and  B's  in 
order  to  show  the  net  balance  invested  in  the  business.   Ordinarily  the  amount 
would  be  shown  as  a  current  asset. 

2.  Accounts  current  are  opened  with  the  partners  inasmuch  as  their  invest- 
ments fluctuate  according  to  the  business  done  (there  being  no  cash  account) 
and  are,  moreover,  of  a  temporary  nature. 

3.  Separate  books  should  be  kept  in  a  case  like  this,  even  though  there 
is  no  cash  account. 


Copyright,  1919,  The  Ronald  Press  Company 


II-11-9 


SUMMARY  OF  PARTNERS'  ACCOUNTS  CURRENT 


ADVANCES  AND  INTEREST: 

Payment  on  Leases  acquired 

Interest — 12  months 

Mortgages  assiuned 

Interest — 12  months 

Legal  Fees  paid 

Interest — 10  months 

Land  Improvements  and  Construction 

Interest — 6  months 

Operating  Expenses  paid 

Interest — 5  months 

Salary  allowance 

Net  Profits  from  Operation 

Total  Credits 

RECEIPTS  FROM  OPERATION: 
Cash  from  Sales 
Interest — 2  months 


Balance  December  31 
♦Debit  Balance. 


B 


( $ I  44,000.00 

2,640.00 

41,000.00  10,000.00   

2,460.00  600.00   

2,550.00 

127.50 

22,600.00 

678.00 

26,850.00 

671.25 

4,000.00  2,000.00   

59,772.89  59,772.89  59,772.88 

$107,232.89  $72,372.89  $159,889.63 


$163,000.00 
1,630.00 

$164,630.00 


$107,232.89  $  72,372.89   *$  4,740.37 


(c) 
ENTRIES  TO  RECORD  SALE  OF  ROYAL  WELLS 


(1) 

Cash 

Reserve  for  Depreciation  on  Construction 
To — Leasehold 

Land  Improvements  and  Construction 
Inventory 

Customers'  Accounts 
Profit  and  Loss 
To  record  sale  of  Royal  wells  as  per  bill  of 
sale  dated .•••••• 


$250,000.00 
479.17 


$  60,614.58 

12,500.00 

1,500.00 

21,500.00 

154,364.59 


(2) 

Profit  and  Loss 

To — A — Account  Current 
B —   ■      ■ 
C—   ■ 
Distribution  of  profit  on  sale  of  Royal  wells. 


154,364.59 


51.454.87 
51,454.86 
51,454.86 


Copyright,  1919,  The  Ronald  Press  Company 


11-11-10 


ANSWERS  TO  QUESTIONS 
Answer  to  Question  41 — 

(a)  The  expenditures  of  $93,083.11  representing  additional  capital  outlay 
would  at  once  be  admitted  as  a  charge  against  the  Property  Account — provided  an 
entry  is  made  relieving  the  Property  Account  and  per  contra  debiting  Deprecia- 
tion Reserve  Account  with  the  cost  value  of  the  machinery  replaced. 

(b)  Conservatively,  an  expense,  unless  certain  officers  are  devoting  part 
of  their  time  to  superintending  the  new  construction,  in  which  case  a  proportion 
of  their  salaries  may  be  regarded  as  a  capital  expenditure,  is  chargeable  to  Plant 
£ind  Equipment. 

(c)  The  amount  may  be  charged  to  an  appropriate  capital  asset  account  and  a 
reserve  created  out  of  profits,  crediting  thereto  each  year  1/27  of  the  cost  of  the 
leasehold.  A  similar  policy  should  be  followed  in  case  buildings  or  improve- 
ments are  put  on  the  land,  inasmuch  as  they  will  be  valueless  at  the  expiration 
of  the  lease.  Short-term  leases  frequently  appear  on  the  balance  sheet  as  a  de- 
ferred charge. 

Answer  to  Question  42 — 

(a)  From  the  description  of  the  expenditure  in  the  question  it  would  appear 
that  the  entire  amount  of  $4,391.27  should  be  charged  against  Repair  and  Main- 
tenance Account — the  expenditures  being  incurred  in  connection  with  repair  work. 
It  may  be,  however,  that  the  work  undertaken  was  more  than  in  the  nature  of  ordi- 
nary repairs  and  involved  the  replacement  or  renewal  of  some  large  parts  of  the 
power  equipment.  In  this  case  an  apportionment  between  operating  expense  and 
depreciation  reserve  would  be  necessary. 

(b)  If  the  remodeling  expenditure  of  $4,131.11  did  not  have  the  effect  of  in- 
creasing the  capacity  of  the  boiler  house  or  reducing  the  cost  of  operation,  it 
would  be  a  charge  to  operating  expense  or  depreciation  reserve.  The  apportion- 
ment would  depend  on  the  extent  to  which  accrued  depreciation  had  been  made  good 
in  the  course  of  the  remodeling.  Any  increase  in  capacity  incident  to  the  re- 
modeling would  of  course  be  chargeable  to  Property  account. 

The  expenditure  of  $5,103.71  in  connection  with  the  extension  is  unques- 
tionably of  a  capital  nature  and  should  be  charged  to  the  proper  capital  asset 
account. 

Answer  to  Question  43 — 

(a)  If  the  repair  and  renewal  was  "ordinary"  it  should  be  charged  in  its  en- 
tirety to  operating  expense.   But  if  part  of  this  expenditure  was  "extraordi- 
nary" in  that  it  made  good  a  portion  of  the  accrued  depreciation  of  the  machine 
shop  equipment,  thus  prolonging  its  life,  that  part  of  the  expenditure  is  properly 
chargeable  to  the  depreciation  reserve. 

Copyright,  1919,  The  Ronald  Press  Company 


11-11-11 

(b)  The  entire  expenditure  being  in  the  nature  of  an  addition  or  extension 
to  the  property  would  at  once  be  admitted  as  a  proper  charge  against  the  Capital 
Asset  Account. 

Answer  to  Question  44 — 

(a)  Work  in  process  has  reference  to  contracts  under  way  or  uncompleted 
jobs  which  should  be  valued  at  the  factory  cost  thereof. 

(b)  Direct  or  productive  labor  represents  that  part  of  labor  engaged  in  the 
production  of  goods  in  contradistinction  to  the  indirect  or  non-productive 
labor.   In  the  case  of  a  company  using  the  job  order  system,  productive  or  direct 
labor  can  be  distributed  over  the  various  jobs  or  orders  upon  which  the  labor 
was  expended. 

(c)  Overhead  expenses  represents  the  general  factory  expenses,  general  €ind 
administrative  expenses,  and  selling  expenses  which  cannot  be  specifically 
alloted  to  certain  orders  or  jobs,  being  distributed  on  a  more  or  less  arbitrary 
basis. 

The  two  general  classes  of  overhead  expenses  are: 

1.  General  factory  expenses  or  factory  overhead 

Non-productive  or  indirect  labor 

Salaries  of  works  manager,  foremen,  and  other  factory  depart- 
ment heads 
Taxes 

Insurance  (fire  and  liability) 

Depreciation  of  buildings,  machinery,  and  equipment 
Repairs  and  renewals  of  buildings,  machinery,  and  equipment 
Power  expenses  • 

Storekeeping  and  receiving  expenses 
Other  miscellaneous  factory  expenses 

2.  General  and  administrative  and  selling  expenses  or  general  and  selling 

overhead: 

General  and  Administrative  Expenses: 
Management  Salaries 
Office  Salaries 
Telegraph  and  Telephone 
Stationery  and  Printing 
General  Traveling  Expenses 

Depreciation  on  General  Office  Furniture  and*  Fixtures 
Corporation  Tax 
Other  Miscellaneous  Expenses 

Selling  Expenses: 

Salesmen's  Salaries  and  Commissions 

Salesmen's  Traveling  Expenses 

District  Office  Expenses 

Advertising 

Other  Miscellaneous  Expenses 

Copyright,  1919,  The  Ronald  Press  Company 


11-11-12 

Answer  to  Question  45 — If  the  factory  burden,  under  normal  conditions,  is 
equivalent  to  100%  of  the  productive  labor,  the  inventory  has  been  fairly  and 
conservatively  valued.   The  difference  between  the  actual  factory  burden  or 
expenses  applicable  to  the  inventory  at  December  31,  1918,  and  the  amount  taken 
up  in  the  inventory  would  be  charged  to  the  Profit  and  Loss  Account  of  the  period 
ended  that  date.  The  amount  of  the  write-off  might  be  sent  out  separately  in  the 
statement  of  profits  and  income  as  a  deduction  from  the  gross  profits  from 
operation  and  described  as  "excess  of  factory  expenses  over  the  normal  burden 
or  overhead. " 

Should  it  be  that  the  actual  factory  expenses  (equivalent  to  120%  of  the 
productive  labor)  represent  the  expenses  under  normal  conditions,  the  inven- 
tory valuation  should  be  adjusted  in  respect  of  the  difference  between  the 
amount  of  $98,111.32  (100%  of  productive  labor)  taken  up  in  the  accounts  and  the 
amount  of  $117,733.58  (120^  of  productive  labor)  that  should  have  been  taken  up. 
It  is  assumed  that  the  items  making  up  the  inventory  of  finished  product  are 
representative  of  the  total  manufactured  product  on  which  the  120%  burden  was 
incurred. 


BALANCE  SHEET  CONSTRUCTION 

The  balance  sheet  has  been  previously  defined  as  a  list  of  the  assets,  liabil- 
ities, and  net  worth  so  arranged  as  to  set  out  as  clearly  as  possible  the  true 
financial  condition  of  an  individual,  firm,  or  corporation  at  a  particular 
moment  of  time. 

In  order  to  set  out  the  true  financial  condition,  the  assets  and  liabilities 
must  be  correctly  valued,  and  the  audit  procedure  involved  will  be  discussed 
in  Lectures  16  to  30.   In  order  to  set  out  the  financial  condition  clearly  it  is 
essential  that  the  assets  and  liabilities  be  correctly  labeled  and  properly 
arranged.  As  no  single  arrangement  will  cover  all  circumstances  the  purpose  for 
which  the  statement  is  to  be  used  should  be  first  ascertained.   The  following 
are  common: 

1.  Internal  report,  not  extending  beyond  the  management  and  directors 

2.  Report  to  stockholders,  such  as  an  annual  report 

3.  Report  to  bankers  with  whom  the  business  carries  on  its  current 

financing 

4.  Report  to  governmental  agencies  including  state  and  federal  income 

tax  collectors,  state  corporation  commission,  and  state  utilities 
commission,  and  Interstate  Commerce  Commission  in  the  case  of 
public  utilities. 

It  is  desirable  to  follow  well-established  precedents,  provided  the  re- 
quired information  is  set  out.  But  it  does  not  follow  that  a  balance  sheet  should 
be  simply  an  arrangement  of  the  ledger  accounts  of  a  business.   Sometimes  it  is 
desirable  practically  to  disregard  the  ledger  accounts.  Most  supervisory  bodies 
such  as.  those  mentioned  in  (4)  have  a  prescribed  form  that  must  be  followed. 


Copyright,  1919,  The  Ronald  Press  Company 


11-11-13 

Variation  in  balance  sheets  according  to  purpose  for  which  used  is  indicated 
in  the  following  references: 

For  Credit  Purposes: 

Uniform  Accounting:  A  Tentative  Proposal  Submitted  by  the  Federal 
Reserve  Board,  (Reprinted  from  Federal  Reserve  Bulletin,  April, 
1917) 
Taxation: 

Schedule  C — 1918  Corporation  Income  and  Profits  Tax  Returns  (Form 
1120) 
Public  Utility  Regulation: 

Interstate  Commerce  Commission  Classification  of  Accounts  for 
Electric  Railways,  1914 

Annual  Reports: 

United  States  Steel  Corporation.  Northern  States  Power  Co.,  Hud- 
son's Bay  Co.,  Studebaker  Corporation,  Goodyear  Tire  and  Rubber 
Co.,  American  Smelting  and  Refining  Company. 

REFERENCES : 

Kester,  Vol.  II,  Chapters  IV  and  V 
Dickinson,  Chapter  II 


Copyright,  1919,  The  Ronald  Press  Company 


II-12-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 

Lecture  12 

STATEMENT  OF  APPLICATION  OF  FUNDS 


Problem  27  (For  class  work) 

From  the  following  comparative  balance  sheets  at  December  31,  1917,  and  1918, 
prepare  a  statement  showing  the  change  in  the  financial  condition  of  the  X  Y  Z 
Company  between  the  two  dates: 

ASSETS 

Real  Estate 

Plant  Equipment 

Small  Tools  and  Other  Equipment 

Inventories 

Customers'  Accounts 

Notes  Receivable 

Accrued  Interest  on  Notes  Receivable 

Consignment  Stocks 

Rent  Paid  in  Advance 

Insurance  Premiums  Prepaid 


LIABILITIES 
Preferred  Stock 
Common  Stock 
First  Mortgage  S%   Bonds 
Notes  Payable 
Accounts  Payable 
Accrued  Interest 
Accrued  Wages 
Accrued  Taxes 
Surplus  Account 


AS  AT  DECEMBER  31 

1917 

1918 

$   50,000.00 

$ 

75,000.00 

350,000.00 

425,000.00 

100,000.00 

130,000.00 

510,000.00 

615,000.00 

260,000.00 

300,000.00 

70,000.00 

85,000.00 

1,500.00 

2,000.00 

90,000.00 

100,000.00 

3,000.00 

4,000.00 

3,500.00 

5,000.00 

$1,438,000.00 

$1 

,741,000.00 

$  300,000.00 

$ 

350,000.00 

250,000.00 

300,000.00 

400,000.00 

500,000.00 

100,000.00 

135,000.00 

145,000.00 

250,000.00 

3,000.00 

4,500.00 

10,000.00 

11,000.00 

2,000.00 

4,000.00 

228,000.00 

186,500.00 

$1,438,000.00 

$1, 

,741,000.00 

Copyright,  1919,  The  Ronald  Press  Company 


II-12-2 

Problem  28 

The  Chicago  Machinery  Manufacturing  Company's  transactions  (manufacturing 
department)  for  the  month  of  March  are  as  follows: 

1.  The  general  stores  department  reports  the  issues  for  the  month  to  be  as 
follows: 

Expended  on 

ORDER  NO.  VALUE 

138  .  $13,013.24 

140  1,039.23 

178  9,113.27 

196  8,302.95 

185  15,992.04 

137  18,047.03 

2.  The  foundry  department  reports  the  castings  made  during  the  month  and  the 
cost  thereof  to  be  as  follows; 

ORDER  NO.  COST 

137  $  3,098.11 
140  4,037.02 
178  9,172.09 
193  11,027.04 
196  1,083.27 
185  31,037.27 

138  19,039.83 

The  credit  in  respect  to  these  items  should  be  carried  to  the  Foundry  Depart- 
ment Account. 

3.  The  productive  labor  for  the  month  amounted  to  $45,546.25  and  was  ex- 
pended on  the  following  orders: 

ORDER  NO.  AMOUNT 

138  $  9,037.31 

140  11,049.02 
178  3,073.27 

196  7,325.33 

185  13,071.32 
137  1,990.00 

4.  The  indirect  factory  expenses  for  the  month  amounted  to  $21,037.11  and 
should  be  distributed  against  the  various  orders  in  the  proportion  that  the  pro- 
ductive labor  on  each  bears  to  the  total  amount  of  productive  labor. 

5.  The  following  orders  were  completed  during  the  month:  138,  140,  185,  and 
137,  and  shipment  made  of  the  finished  product.  Assume  for  the  purposes  of  the 
problem  that  there  was  no  work  in  progress  at  the  beginning  of  the  month. 

Copyright,  1919,  The  Ronald  Press  Company 


II-12-3 

6.  The  selling  prices  of  the  orders  that  were  shipped  were  as  follows: 

ORDER  NOi  SELLING  PRICE 

138  $50,000.00 

140  20,000.00 

185  60,000.00 

137  40,000.00 

Formulate  all  of  the  entries  necessary  in  respect  to  the  foregoing  and  pre- 
pare a  statement  showing  the  gross  profit  on  each  order. 

Problem  29 

From  the  following  balance  sheets  prepare  a  statement  showing  the  applica- 
tion of  the  funds  during  the  year  ending  December  31,  1918: 

ROCKWELL  MANUFACTURING  CO. 
BALANCE  SHEET,  DECEMBER  31,  1917 

ASSETS 

CAPITAL  ASSETS: 

Land  $100,000.00 

Buildings  190,000.00 

Machinery  and  Equipment  240,000.00  $  530,000.00 


CURRENT  ASSETS: 

Inventories  $160,000.00 
Customers'  Accounts  and  Notes  Receivable  (less 

reserves)  275,000.00 

Sundry  Debtors  25,000.00 

Cash  on  Hand  and  in  Bank  35 , 000. 00     495 ,  000. 00 


DEFERRED  CHARGES  TO  INCOME  15,000.00 


$1,040,000.00 


LIABILITIES 
CAPITAL  STOCK  ISSUED  AND  OUTSTANDING  |   500,000.00 

FIRST  MORTGAGE  6%   BONDS  200,000.00 

CURRENT  LIABILITIES: 

Bank  Loans  $225,000.00 

Other  Liabilities  25,000.00     250,000.00 


SURPLUS  90,000.00 


$1,040,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-12-4 

BALANCE  SHEET,  DECEMBER  31,  1918 

ASSETS 
CAPITAL  ASSETS: 

Land  $150,000.00 

Buildings  290,000.00 

Machinery  and  Equipment  385,000.00  $  825,000.00 


CUERENT  ASSETS: 

Inventories  $231,000.00 
Customers'  Accounts  and  Notes  Receivable  (less 

reserves)  264,000.00 

Sundry  Receivables  28,000.00 

Cash  on  Hand  and  in  Bank  32,000.00     555,000.00 


DEFERRED  CHARGES  TO  INCOME  20,000.00 


$1,400,000.00 


LIABILITIES 
CAPITAL  STOCK  ISSUED  AND  OUTSTANDING  $  650,000.00 

FIRST  MORTGAGE  6%  BONDS  300,000.00 

CURRENT  LIABILITIES: 

Bank  Loans  $275,000.00 

Other  Liabilities  40,000.00     315,000.00 


SURPLUS  135,000.00 


$1,400,000.00 


NOTE — The  only  debit  against  the  Surplus  Account  is  a  $50,000  dividend  de- 
clared and  paid. 


MISCELLANEOUS  QUESTIONS  I 

Question  56 — Explain  and  illustrate  how  you  would  arrive  at  the  book  value 
of  the  capital  stock  of  a  corporation. 

Question  57 — Some  companies  consider  that  the  following  expenditures  are 
proper  charges  to  include  as  part  of  the  cost  of  manufacture: 

(a)  Interest  on  borrowed  money 

(b)  General  and  administrative  expenses  other  than  office  expenses 

(c)  Rent 
What  is  your  opinion? 

Question  58 — A  machinery  manufacturing  concern  has  constructed  a  new  machine 
shop  and  equipped  it  with  new  machinery.  A  portion  of  the  work  has  been  done  by 

Copyright,  1919,  The  Ronald  Press  Company 


II-12-5 

the  company's  own  men  and  a  portion  by  outside  contractors.   The  extension  has 
rendered  it  necessary  to  provide  increased  power,  and  consequently  an  old  engine 
has  been  sold  and  been  replaced  by  a  larger  one. 

How  would  you  undertake  to  satisfy  yourself  that  the  proper  entries  were 
made  in  respect  of  the  foregoing? 

Question  59 — How  do  you  consider  that  the  following  items  should  be  dis- 
tributed in  the  accounts  of  a  manufacturing  concern? 

(a)  Payments  totaling  $83,150  on  account  of  "Construction  Work  in 

Progress."   This  amount  represents  about  25%  of  the  total  amount 
to  be  paid  under  the  respective  contracts;  furthermore,  it  is 
estimated  that  it  will  take  from  four  to  five  months  to  complete 
the  construction  of  the  plant. 

(b)  Outstanding  liabilities  of  $33,103.11  in  respect  of  construction 

work  completed  prior  to  the  close  of  the  year.  The  liabilities 
referred  to  were  not  taken  up  in  the  books  before  closing  at 
December  31,  1918. 

Question  60 — The  machinery  account  of  a  certain  manufacturing  company  shows 
a  debit  of  $100,000.   One  of  the  machines,  originally  charged  to  the  account 
at  $10,000,  is  sold  for  $9,000.   The  recorded  depreciation  reserve  on  the 
machine  to  the  date  of  sale  is  $400. 

Show  the  journal  entries  necessary  to  record  the  sale. 

Solution  to  Problem  27 

X  Y  Z  COMPANY 
STATEMENT  SHOWING  CHANGE  IN  FINANCIAL  CONDITION 
DURING  THE  YEAR  ENDING  DECEMBER  31,  1918 
FUNDS  PROVIDED: 

Sale  of  Preferred  Stock  at  par  $50,000.00 

Sale  of  Common  Stock  at  par  $50,000.00  $100,000.00 


First  Mortgage  6%  Bonds  at  par  100,000.00 


OR  A  TOTAL  OF  $200,000.00 


WHICH  WAS  APPLIED  IN  THE  FOLLOWING  MANNER: 

Expenditures  in  the  acquisition  of  additional 
properties: 

Land  $25,000.00 

Plant  Equipment  75,000.00 

Small  Tools,  etc.  30,000.00  $130,000.00 


Losses  from  Operation  during  year  ending 

December  31,  1918  41,500.00 

Net  Increase  in  Working  Capital  as  summarized  below  28,500.00 


(AS  ABOVE)  $200,000.00 

Copyright,  1919,  The  Ronald  Press  Company 


II-12-6 


SUMMARY  OF  WORKING  CAPITAL 
AS  AT  DECEMBER  31 


CURRENT  ASSETS: 
Inventories 
Accounts  Receivable 
Notes  Receivable 
Accrued  Interest  thereon 
Consignment  Stocks 
Rent  Paid  in  Advance 
Insurance  Premiums 


CURRENT  LIABILITIES: 
Notes  Payable 
Accounts  Payable 
Accrued  Taxes,  etc, 


1917 

$510,000.00 

260,000.00 

70,000.00 

1,500.00 

90,000.00 

3,000.00 

3,500.00 


1918 
615,000.00 
300,000.00 
85,000.00 

2,000.00 
100,000.00 

4,000.00 

5,000.00 


$938,000.00  $1,111,000.00 


$100,000.00  $  135,000.00 

145,000.00     250,000.00 

15,000.00      19,500.00 


$260,000.00  $  404,500.00 


Working  Capital 


$678,000.00  $  706,500.00 


INCREASE  DECREASE 

$105,000.00  

40,000.00  

15,000.00  

500.00  

10,000.00  

1,000.00  

1,500.00  

$173,000.00  

$  35,000.00  

105,000.00  

4,500.00  

$144,500.00  

$  28,500.00  


Another  form  very  commonly  used  in  those  cases  where  funds  are  provided 
from  only  one  or  two  sources  is  given  below. 

The  proceeds  from  the  sale  of  preferred  stock  $50,000;  common  stock 
$50,000;  and  first  mortgage  6%  bonds  $100,000 — aggregating  in  all  $200,000— 
were  applied  in  the  following  manner: 

1.  Losses  from  operation  during  the  year  1918       $  41,500.00 

2.  Expenditures  in  the  acquisition  of  additional 

properties: 

Land  $25,000.00 

Plant  Equipment  75,000.00 

Small  tools  and  other  equipment  30,000.00 


Or  a  total  of  130,000.00 

3.  Net  increase  in  the  working  capital  as  summarized   28,500.00 


(As  above) 


$200,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


11-12-7 


Solution  to  Problem  23 

(1) 
Missouri  Pacific  First  Mortgage  Bonds  $90,000.00 

C.  &  N.  W.  Ry,  Co.  First  Mortgage  Bonds         125,000.00 
Loans  to  Sundry  Persons  39,000.00 

Preferred  Stock  in  the  New  Mfg.  Co.  35,000.00 

Investment  in  the  firm  of  C  4  D  34,000.00 

To — Estate  Account  $300,000.00 

Sundry  Liabilities  23,000.00 

To  record  C's  NET  assets,  per  inventory, 
at  his  death  June  15,  1918. 

(2) 
Estate  Account  3,000.00 

To — Sundry  Liabilities  3,000.00 

To  take  up  the  additional  liabilities  dis- 
closed subsequent  to  the  date  of  inven- 
tory, June  15,  1919. 

(3) 

Cash  329,500.00 

To — Missouri  Pacific  First  Mortgage 

Bonds  94,000.00 

C.  &  N.  W.  Ry.  Co. ,  First  Mortgage 

Bonds  131,000.00 

Loans  to  Sundry  Persons  24,500.00 

Preferred  Stock  in  the  New  Mfg.  Co.  40,000.00 

Investment  in  the  firm  of  C  &  D  40,000.00 

To  record  the  proceeds  from  the  sale  of 

assets. 

(4) 
Missouri  Pacific  Ry.  First  Mortgage  Bonds         4,000.00 
C.  4  N.  W.  Ry.  Company  First  Mortgage  Bonds      6,000.00 
Preferred  Stock  in  the  New  Mfg.  Compaay  5,000.00 

Investment  in  the  firm  of  C  t  D  6,000.00 

To — Estate  Account  21,000.00 

_^    To  transfer  profit  on  realization  of  assets. 

(5) 
Estate  Account  14,500.00 

To — Loans  to  Sundry  Persons  14,500.00 

To  transfer  loss  on  realization  of  assets. 

(8) 
Sundry  Liabilities  26,000.00 

To — Cash  26,000.00 

To  record  payment  of  sundry  liabilities. 

NOTE— Cash  book  entries  presented  in  journal  form  for  convenience. 
Copyright,  1919,  The  Ronald  Press  Company 


II-12-8 

Solution  to  Problem  24 

(1) 

Life  Insurance  Policy  (face  value)  $  5,000.00 

Preferred  Stock — Wilson  Manufacturing  Co.  100,000.00 

Dividend  Receivable* — Wilson  Manufacturing  Co.  10,000.00 

Loan  to  John  Smith  25,000.00 

First  Mortgage  5%  Bonds — Western  Lumber  Co.  291,000.00 
Interest  Accrued: 

On  Loan  to  John  Smith     $  750.00 

On  First  Mortgage  5%  Bonds  4,850.00  5,600.00 


To — Sundry  Liabilities  $  8,000.00 

Policy  Loan  1,000.00 

Accrued  Interest  on  Policy  Loan  (July 

1,  1915,  to  July  1,  1918)  150.00 

Cash  1,350.00 

Estate  426,100.00 

To  record  assets  and  liabilities  as  ap- 
praised at  July  1,  1918,  as  per  inventory 
filed  in  probate  court  on  

(2) 
Cash  750.00 

To — Accrued  Interest  (John  Smith  Loan)  750.00 

Interest  due  July  1,  1918,  and  presumably  received. 

(3) 
Cash  10,000.00 

To — Dividend  Receivable  10,000.00 

To  record  receipt  of  dividend  from  Wilson 
Manufacturing  Co.   (Entry  made  on  assump- 
tion that  dividend  was  paid  in  cash.) 

(4) 
Policy  Loan  1,000.00 

Accrued  Interest  on  Policy  Loan  (Sept.  1,  1915, 

to  July  1,  1918)  150.00 

Cash  3,845.83 

Interest  Paid  (July  1,  1918,  to  August  1,  1918)       4.17 

To — Life  Insurance  Policy  5,000.00 

Policy  paid  less  loan  and  accrued  interest  on 
loan  from  July  1,  1915,  to  August  1,  1918. 

(5) 
Funeral  Expenses  900.00 

To — Cash  900.00 

Payment  of  funeral  expenses. 


*In  absence  of  more  specific  information  it  has  been  assumed  that  the  divi- 
dend was  declared  prior  to,  but  paid  subsequent  to,  the  date  of  A's  death. 

Copyright,  1919,  The  Ronald  Press  Company 


II-12-9 


(6) 

Cash  $  7,275.00 

To — Accrued  Interest  on  Western  Lumber 

Co.  First  Mortgage  5%  Bonds  $  4,850.00 

Interest  Received  2,425.00 

To  record  the  receipt  of  the  interest  due 
September  1. 

(7) 
Cash  301,212.50 

To — First  Mortgage  5%  Bonds  300,000.00 

Interest  Received  1,212.50 

Proceeds  from  sale  of  Western  Lumber  Co. 
First  Mortgage  5%  Bonds  plus  accrued 
interest  to  October  1,  1918. 

(8) 

First  Mortgage  Bonds  9,000.00 

To — Estate  Account  9,000.00 

To  transfer  profit  on  sale. 

(9) 

Sundry  Liabilities  8,000.00 

To — Cash  8,000.00 

Liabilities  paid. 

(10) 
Interest  Received  3,637.50 

To — Interest  Paid  4.17 

Income  Account  3,633.33 

(11) 
Income  Account  3,633.33 

To— Cash  3,633.33 

Payment  to  widow  of  net  income  collected  to 
December  31,  1919. 

(12) 
Estate  900.00 

To — Funeral  Expenses  900.00 

To  close  latter  account. 


Copyright,  1919,  The  Ronald  Press  Company 


11-12-10 


PARTICULARS 
Interest — John 

Smith 
Dividends  Receiv- 
able Wilson 

Mfg.  Co. 
Life  Ins.  Policy 
Interest  on  Policy 

July  1  to  Aug.  1, 

(contra) 
Western  Lumber 

Co.  :  First  Mtge. 

5%  Bond  Interest 
Western  Lumber 

Co. :  First  Mtge. 

5%  Bonds  Sold 
Accrued  Interest 


SUMMARY  OF  CASH  TRANSACTIONS 
PRINCIPAL    INCOME 
$    750.00 


10,000.00 
3,845.83 


4.17 

4,850.00  $2,425.00 

300,000.00 

1,212.50 


$319,450.00  $3,637.50 


PARTICULARS    PRINCIPAL 
Balance         $  1,350.00 
Interest  on  Policy 

July  1  to  Aug.  1, 

(contra) 
Funeral  Expenses      900.00 
Sundry  Liabilities   8,000.00 
Widow 
Balance  309,200.00 


INCOME 


4.17 


3,633.33 


$319,450.00  $3,637.50 


ANSWERS  TO  QUESTIONS 

Answer  to  Question  46 — An  "Account  Current"  represents  an  account  between 
two  individuals,  firms,  companies,  or  offfices,  which  is  "continuing,"  that  is 
to  say,  a  running  account  or  an  open  account. 

B  &  CO. 

IN  ACCOUNT  WITH  A  &  CO. ,  DEBTOR 
ACCOUNT  CURRENT 
FROM  APRIL  1,  1919,  TO  AUGUST  31,  1919 


DATE 

DATE 

1919    PARTICULARS 

AMOUNT 

1919    PARTICULARS 

AMOUNT 

April  1  Goods 

$ 

500.00 

May   1  Cash 

$  220.00 

July  1  Cash 

830.00 

June  16  Goods 

1,250.00 

July  15  Cash 

750.00 

Aug.   1  Goods 

1,250.00 

INTEREST  ON  ABOVE  AMOUNTS: 

Aug.  15  Goods 

550.00 

5  mo.  @  6%  on  $500  $12.50 

INTEREST  ON  ABOVE  AMOUNTS: 

2   "  "  6%  "   830    8.30 

4  mo.  @  6%  on  $  220 

$4. 

.40 

1]^     "  "  6%  "   750    5.62 

26.42 

2^  "  "  6^  "   1,250 

1   "  "  6%  "   1,250 

^  "  "  6%  "     550 

15, 
6. 
1. 

,62 
.25 
,37 

Balance  due  from  A  &  Co. 

1 

,191.22 

27.64 

$3 

,297.64 

$3,297.64 

Copyright,  1919,  The  Ronald  Press  Company 


11-12-11 

Answer  to  Question  47 — In  the  preparation  of  a  balance  sheet  it  would  be 
incorrect  to  state  the  net  branch  office  account  under  the  heading  of  Sundry- 
Debtors,  which  is  a  term  used  to  cover  miscellaneous  accounts  due  to  the  com- 
pany.  It  must  be  remembered  that  a  branch  office  is  only  a  part  of  the 
organization  and  may  cover  capital  assets,  current  assets,  deferred  charges, 
current  liabilities,  etc.   Consequently,  the  net  branch  office  account  cannot 
be  considered  an  account  receivable  because — 

1.  It  is  incorrect  to  offset  liabilities  against  assets 

2.  It  generally  includes  assets  other  than  accounts  receivable 

3.  If  the  net  branch  office  account  should  happen  to  consist  only  of 
accounts  receivable,  in  all  probability  they  were  created  through  the  sale  of 
product  and  consequently  should  be  shown  as  Customers'  Accounts  Receivable 
instead  of  Sundry  Debtors. 


Answer  to  Question  48 — 


JOURNAL  ENTRIES 


(a) 
Cash  $76,500.00 

Fire  Loss  12,450.00 

To — Buildings  $50,000.00 

Fixtures  8,950.00 

Merchandise  Inventory  30,000.00 

To  record  fire  loss  recovered  from  the  Insurance 
Company,  and  loss  sustained  over  and  above 
insurance  carried. 

(b) 
Real  Estate  15,500.00 

To — Capital  Surplus  arising  from  revalua- 
tion of  real  estate  15,500.00 
To  record  additional  appraised  valuation  of 
land  as  per  minutes  of  board  of  directors, 

P 

(c) 
Real  Estate  40,000.00 

Interest  Paid  in  Advance  436.50 

To — Notes  Payable  40,436.50 

Notes  given  on  purchase  of  real  estate. 

Answer  to  Question  49 — The  form  in  which  accounts  are  submitted  to  the 
probate  court  depends  on  whether  the  court  has  prescribed  any  particular  form, 
and  depends  also  on  the  character  of  the  estate.. 

If  no  special  form  is  required,  the  following  statements  may  be  submitted: 

1.  A  comparative  balance  sheet  as  of  the  opening  and  close  of  the 

period,  together  with  the  Increases  and  decreases, 

2.  Necessary  supporting  schedules. 

3.  Statements  showing  application  of  funds  for  the  period. 

4.  Statement  of  income  and  expenditure  for  the  period. 

5.  Statement  of  cash  receipts  and  disbursements  for  the  period. 

Copyright,  1919,  The  Ronald  Press  Company 


11-12-12 

Answer  to  Question  50 — 

(a)  CAPITAL  SURPLUS  may  be  briefly  defined  as  that  part  of  the  surplus 
which  is  not  available  for  dividends  in  that  it  has  not  arisen  from  realized 
profits  or  in  that  it  has  been  specifically  set  aside  by  the  board  of 
directors.   In  this  class  would  appear — 

1.  Premium  on  capital  stock 

2.  Writing-up  of  capital  assets 

3.  Appropriation  of  earned  surplus  required  by  law  or  contract 

4.  Donations 

(b)  SURPLUS  PROFITS  available  for  dividends  represent  the  profits  for  the 
period  after  all  deductions  have  been  made  in  respect  of  operating  expenses, 
interest  charges,  appropriations  from  earnings  for  depreciation,  sinking  fimds, 
etc.   These  profits  are  accumulated  in  a  account  called  Surplus  until  the 
Directors  declare  dividends. 

(c)  ORGANIZATION  OR  PRELIMINARY  EXPENSES  are  expenses  incurred  in  con- 
nection with  the  organization  of  a  corporation  and  consist  of  attorney's  fees, 
incorporation  fees,  promoter's  expenses,  printing  of  prospectus,  etc. 

The  best  practice  is  to  write  off  expenses  of  this  nature  within  a  com- 
paratively short  period,  generally  within  three  to  five  years. 


STATEMENT  OF  APPLICATION  OF  FUNDS 

Moody's  Manual  and  other  investment  publications,  whose  purpose  is  to 
furnish  financial  data  on  industrial  and  other  corporations,  emphasize  the 
importance  of  the  comparative  balance  sheet.  Much  information  may  be  furnished 
the  prospective  investor  by  explaining  to  him  the  changes  that  have  taken 
place  year  by  year  in  the  financial  policies  of  a  corporation.   To  compare 
satisfactorily  successive  balance  sheets  requires  a  knowledge  of  what  each 
balance  sheet  contains,  and  while  it  is  to  be  hoped  that  the  balance  sheet 
of  the  future  may  become  sufficiently  standardized  and  self-explanatory,  so 
that  it  may  "speak  for  itself,"  it  is  apparent  that  the  casual  observer  cannot 
make  the  proper  analysis  of  a  single  balance  sheet,  or  series  of  balance 
sheets,  without  recourse  to  considerable  additional  information. 

Again,  the  management  of  a  business  may  be  unable  to  visualize  the 
financial  changes  that  have  taken  place  during  a  given  period.   Or,  during  a 
period  in  which  new  capital,  owned  or  borrowed,  has  been  added  to  a  business, 
the  necessity  may  arise  for  a  comprehensive  summary  which  will  more  or  less 
graphically  set  off  the  capital  sums  obtained  against  the  new  assets  or  working 
capital  required. 

The  purpose  of  a  statement  of  application  of  funds  is  to  analyze  the 
balance  sheet  changes  between  one  date  and  another.  Problem  27  and  its 
solution,  both  appearing  in  this  lecture,  illustrate  the  preparation  of  such  a 
statement.   This  case  is  a  simple  one.   The  funds  provided  during  the  fiscal 
period  of  most  businesses  will  be  limited  to  profits  from  operation  and  addi- 
tions to  reserves.  Here  there  were  losses,  which  means  that  more  funds  were 
expended  i-n  connection  with  material,  labor  and  operating  expenses  than  were 
realized  from  sales. 

Copyright,  1919,  The  Ronald  Press  Company 


11-12-13 

The  following  items  are  included  among  funds  provided: 

1.  Cash  realized  from  sales  of  securities  issued. 

2.  Cash  realized  from  sales  of  securities  owned  or  other  assets. 

3.  Profits  from  operation. 

4.  Additions  to  reserves  excluded  from  (3),  such  as  reserves  for  depre- 

ciation, obsolescence,  insurance,  etc. 

5.  Proportion  of  discounts  on  bonds  and  stock  amortized.  These  and 

other  similar  items  may  be  added  back  to  (3) 

6.  Decreases  in  working  capital 

Applications  of  funds  include: 

1.  Additions  to  capital  assets 

2.  Losses  from  operation 

3.  Purchase  of  securities  for  investment 

4.  Extraordinary  expenditures  of  various  kinds  not  included  elsewhere 

5.  Increases  in  working  capital 

The  increase  or  decrease  in  working  capital  (the  excess  of  current  assets 
and  prepaid  expenses  over  current  liabilities)  usually  appears  as  a  single 
figure  in  this  statement.  Working  capital  is  subject  to  a  multitude  of  changes 
during  any  period  of  business  operations,  and  while  each  item  is  important 
from  the  point  of  view  of  the  balance  sheet,  the  individual  items  lose  their 
significance  in  a  statement  of  application  of  funds  since  they  are  constantly 
in  a  state  of  change — raw  materials,  finished  goods,  customers*  accounts,  cash, 
raw  materials — a  steady  cycle.   Occasionally  a  marked  variation  in  £in  item  of 
working  capital  is  shown  separately.   Thus,  if  an  issue  of  securities  is 
floated  to  pay  off  current  bank  loans,  W3  would  expect  to  find  the  latter 
separately  listed  among  the  funds  applied. 

Profits  arising  from  "book  profits,"  such  as  write-ups  in  asset  valuations, 
stock  dividends,  etc.,  would  be  shown  on  the  statement  of  application  of 
funds  as  memoranda  only.   If  the  "net  profit  from  operation"  varies  from  the 
amount  of  profit  shown  elsewhere,  it  is  desirable  to  set  out  the  recon- 
ciliation as  follows: 

Net  Profits  as  per  Exhibit  II  $30,475.24 

Add — Loss  from  Sales  of  U.  S.  Steel 

Preferred  held  as  investmant      $1,520.00 
Proportion  of  Discount  on  Bonds 

written  off  1,100.00    2,620.00 


$33,095.24 


Copyright,  1919,  The  Ronald  Press  Company 


II-13-1 

COMPLETE  ACCOUNTING  COURSE— FART  II 
Lecture  13 
PROFIT  AND  LOSS  CONSTRUCTION 


Problem  30 

Two  professional  firms,  consisting  of  two  partners  each,  agree  to  amalgamate. 
Jones  and  Robinson  have  accounts  receivable,  |12,500,  and  other  assets  taken  as 
net,  $1,250.   Sikes  and  Wilson  have  accounts  receivable,  $11,000,  and  other 
assets  net,  $1,000,  each  firm  bringing  $2,500  in  cash  and  discharging  its  own 
liabilities,  with  an  arrangement  that  the  partners  of  each  firm  shall  have  a 
preferential  allowance  of  15  per  cent  on  professional  fees  arising  from  the 
connections  of  each  firm. 

At  the  end  of  twelve  months  ending  December  31,  1918,  the  earnings  were 
$49,500,  of  which  $19,000  came  from  Jones  and  Robinson's  introduction,  $23,000 
from  Sikes  and  Wilson's,  and  the  rest  fron  neutral  ground.  The  accounts  receiv- 
able of  Jones  and  Robinson  were  realized  at  an  average  loss  of  6  per  cent ;  those 
of  Sikes  and  Wilson  at  5  per  cent.  The  expenses  were  $16,725. 

As  at  the  end  of  the  year,  make  out  the  profit  and  loss  statement  of  the 
amalgamated  firm  and  the  Capital  Accounts  of  each  partner,  allowing  interest  on 
the  net  assets  and  cash  brought  in  at  5  per  cent  per  annum,  but  none  on  the  ac- 
counts receivable.  The  drawings  have  been:  Jones,  $5,000;  Robinson,  $3,250; 
Sikes,  $5,500;  Wilson,  $3,500 — without  interest. 

Profits  are  divided  as  follows:  Jones  and  Sikes,  three-tenths  each;  Robinson 
and  Wilson,  two-tenths  each.  The  same  proportions  govern  the  division  of  assets 
brought  in  and  the  preferential  allowances. 

Problem  31 

From  the  following  nominal  accounts  and  supplementary  data  abstracted 
from  the  books  of  the  A  B  Company  at  the  close  of  business  December  31,  1917,  and 
December  31,  1918,  prepare  a  comparative  statement  of  profits  and  income  and  an 
£inalysis  of  causes  of  changes  in  profits  earned: 

ACCOUNT  DECEMBER  31,  1917  DECEMBER  31,  1918 

Purchases  $46,000.00  $51,000.00 

Interest  Paid  1,213.00  1,660.00 

Wages  and  Salaries  12,000.00  22,600.00 

Salesmen's  Salaries  4,100.00  5,600.00 

Selling  Expenses  1,800.00  2,000.00 

Officers'  Salaries  4,000.00  5,000.00 

Office  Expenses  2,236.42  1,550.00 

Freight-in  896.12  1,200.00 

Frei^t-out  324.00  460.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-13-2 


Sales 

Interest  Received 
Inventory  at  beginning 
Accrued  Interest  on: 
Bills  Receivable 
Bills  Payable 
Inventory  at  end 


12,450.00 


73.50 


$86,000.00 
700.00 


63.00 


17,000.00 


17,000.00 


126.00 


$107,000.00 
1,100.00 


140.00 


18,000.00 


■  MISCELLANEOUS  QUESTIONS 


Question  61 — 


(a)  Differentiate  between  a  sinking  fund  reserve  and  a  depreciation  reserve 
as  to: 

1.  Purpose 

2.  Manner  created 

3.  Ultimate  disposition 

(b)  Under  what  circumstances  could  a  sinking  fund  reserve  be  used  in  lieu  of 
a  depreciation  reserve? 

Question  62 — Formulate  entries  in  respect  of  the  following: 

(a)  Annual  provisions  for  sinking  fund  requirements  for  the  five  years 

ended  December  31,  1918,  $130,000 

(b)  Under  the  provisions  of  the  trust  deed,  an  equivalent  amount  was 

paid  over  to  the  trustees 

(c)  Increments  to  sinking  fund  represented  in  interest  received,  etc. 

$2,983.27 

(d)  Bonds,  $100,000,  redeemed  through  the  operation  of  the  sinking  fund 

Question  63 — The  New  Manufacturing  Company  disposed  of  its  entire  first 
mortgage  6%  bond  issue  of  $500,000  at  90 — the  proceeds  therefrom  being  used  to 
meet  the  payment  of  obligations  arising  through  the  construction  of  a  new  plant. 

Formulate  the  necessary  entries  to  record  the  transaction  and  state  how  the 
discount  item  should  be  dealt  with  in  the  books. 

Question  64 — During  the  fiscal  year  ending  December  31,  1918,  the  profits 
of  the  R  Co.  amounted  to  $12,000,  which  were  not  sufficient  to  justify  the 
declaration  and  payment  of  a  dividend.  The  directors  propose  that  the  deprecia- 
tion provisions  for  that  year  be  reduced  in  order  that  after  deducting  the 
proposed  dividend  the  Profit  and  Loss  account  will  still  reflect  a  credit 
balance.  What  is  your  opinion  of  the  proposed  treatment? 

Question  65 — The  B  C  Company  indorsed  certain  notes  given  by  another  com- 
pany in  respect  of  bank  loans  made  ty  that  company.  What  cognizance,  if  any, 
would  be-  taken  of  this  fact  in  the  balance  sheet  of  the  B  C  Company  prepared  as  of 
December  31,  1918 — the  notes  were  outstanding  at  that  date. 


Copyright,  1919,  The  Ronald  Tress  Company 


Solution  to  Problem  25 


II-13-3 


Exhibit  II 


A  B  MANUFACTURING  COMPANY 

STATEMENT  OF  PROFITS  AND  INCOME 

MONTH  ENDING  JANUARY  31,  1918 

GROSS  SALES  $127,050.00 

DEDUCT— Discount  on  Sales  '  |2,380.00 

Freight  Allowances  6,180.00     8,560.00 


NET  PROCEEDS  FROM  SALES  118,490.00 

COST  OF  SALES  (Exhibit  II-B)  73,924.63 


GROSS  PROFIT  FROM  OPERATION  44,565.37 

DEDUCT—GENERAL  AND  ADMINISTRATIVE  EXPENSES: 

Office  and  Management  Salaries  $3,900.00 

Depreciation  of  Office  Furniture  and  Fixtures  31.25 

General  Expenses  1,800.00     5,731.25 


NET  PROFITS  FROM  OPERATION  38,834.12 

DEDUCT— INTEREST  ON  BORROWED  MONEY: 

On  Notes  Payable  %     300.00 

On  Bonded  Indebtedness  1,500.00     1,800.00 


SURPLUS  NET  PROFITS  (carried  to  Surplus)  $  37,034.12 


Copyright,  1919,  The  Ronald  Press  Company 


II-13-4 


A  B  MANUFACTURING  COMPANY 
STATEMENT  SHOWING  COST  OF  PRODUCTION 
MONTH  ENDING  JANUARY  31.  1918 

(Production,  12,000,000  pounds) 


Exhibit  II-B 


RAW  MATERIALS  USED: 

Purchases  Raw  Material 

LESS — Inventory  January  31,  1918 

LABOR 

FACTORY  EXPENSES: 

Shop  Expenses 

Heat  and  Power 

Insurance 

Factory  Office  Supplies 

Shop  Supplies 

Depreciation — Buildings 
Machinery 

COST  OF  PRODUCT  MANUFACTURED 


AMOUNT 
$168,675.00 

47,580.00   $121,095.00 


4,395.00 
3,360.00 
195.42 
735.00 
7,080.00 
1,002.53 
1,321.12 


38,235.00 


18,089.07 


$177,419.07 


PER  POUND 


1.01478492" 


FINISHED  PRODUCT  STOCK  ACCOUNT 
DEBITS  POUNDS       PER  POUND 


AMOUNT 


Inventory 
Product  Produced 


12,000,000 


.01478492    177,419.07 


12,000,000    $  .01478492   $177,419.07 


CREDITS 
Cost  of  Product  Sold 
Inventory 


5,000,000   $  .01478492   $  73,924.63 
7,000,000     .01478492    103,494.44 


12,000,000    $  .01478492   $177,419.07 


Copyright,  1919,  The  Ronald  Press  Company 


II-13-5 

Exhibit  I 


A  B  MANUFACTURING  COMPANY 
BALANCE  SHEET,  JANUARY  31.  1918 


ASSETS 
CAPITAL  ASSETS: 
Land 

Buildings    $481,215.00 
Machinery    211,380.00 
Office  Furni- 
ture & 
Fixtures      3,750.00 


%   67,200.00 


$696,345.00 


DEDUCT~De- 
preciation 
Reserve 


2,354.90   693,990.10 


$761,190.10 


CURRENT  ASSETS: 
Inventories  of 
Finished 

Product    $103,494.44 
Raw  Materials 
it   Supplies    51,225.00 


$154,719.44 

Customers* 
A/c  $109,500 

LESS— 
Reserves, 
Freight 
Allow- 
ances, k 
Dis- 
counts 7,225  102,275.00 


Cash 


44,370.00   301,364.44 


LIABILITIES 
CAPITAL  STOCK: 

Authorized  and  Issued     $600,000.00 

FIRST  MORTGAGE  6%  BONDS : 

Authorized  and  Issued      300,000.00 

$900,000.00 
CURRENT  LIABILITIES: 

Notes  Payable   $60,000.00 
Accounts  Payable  66,960.00 
Accrued  Wages     4,500.00 
Accrued  Bond 
Interest        1,500.00  132,960.00 


SURPLUS  ACCOUNT: 

Net  Profit  for  the  month 
of  January,  1918,  as  per 
Statement  of  Profits  and 
Income  (Exhibit  II) 


37,034.12 


DEFERRED  CHARGES : 
Prepaid  In- 
terest 
Insurfince 
Unexpired 


I  600.00 
6,839.58 


7,439.58 


$1,069,994.12 


$1,069,994.12 


Copyright,  1919,  The  Ronald  Press  Company 


II-13-6 

JOURNAL  ENTRIES 

(1) 

Raw  Materials  Used  $121,095.00 

To — Raw  Materials  Purchased  $121,095.00 

Raw  Materials  consumed  as  per  storekeeper's 
reports. 

(2) 
Labor  4,500.00 

To — Accrued  Wages  4,500.00 

To  provide  for  the  accrued  wages  at  January- 
Si,  1918. 

(3) 

Freight  on  Sales  5,475.00 

To — Reserve  for  Outstanding  Freight  Allow- 
ances 5,475.00 
To  provide  for  the  estimated  amount  of  the 
outstanding  freight  allowances  at  January 
31,  1918  (5%  of  $109,500) 

(4) 

Discount  and  Allowances  1,750.00 

To — Reserve  for  Discounts  11,750.00 

To  provide  for  the  estimated  allowances  on 
account  of  Sales  Discounts. 

(5) 
Interest  on  First  Mortgage  6%  Bonds  1,500.00 

To — Accrued  Bond  Interest  1,500.00 

To  provide  for  the  accrued  interest  for  the 
month  of  January,  1918,  on  the  First  Mortgage 
6%  Bonds  outstanding. 

(6) 
Depreciation  on  Buildings  1,002.53 

Depreciation  on  Machinery  1,321.12 

Depreciation  on  Furniture  and  Fixtures  31.25 

To — Reserve  for  Depreciation  2,354.90 

Provision  for  month  of  January  made  up  as  follows: 

DEPRE- 
BOOK  VALUES  ANNUAL  CIATION 

RATE  JAN.,  1918 
Buildings     $481,215.00  2%%   $1,002.53 
Machinery      211,380.00  I'^klo        1,321.12 
Office  Furn. 

and  Fixt.      3,750.00  10  %      31.25 


$696,345.00       $2,354.90 


Copyright,  1919,  The  Ronald  Press  Company 


II-13-7 


(7) 

Shop  and  Factory  Office  Supplies  $7,815.00 

To — Storekeeper's  Account  $7,815.00 

Issues  of  supplies  during  the  month  of  Jan- 
uary, 1918,  as  per  storekeeper's  distribution 
reports. 

(8) 

Insurance  195.42 

To — Unearned  Insurance  Premiums  195.42 

To  write  off  the  amount  of  the  earned  insurance 
premiums  for  the  month  of  January,  1918. 

(9) 

Prepaid  Interest  Account  600.00 

To — Interest  on  Notes  Payable  600.00 

Interest  prepaid  at  January  31,  1918. 


Copyright,  1919,  The  Ronald  Press  Company 


II-13-8 


Solution  to  Problem  26 


THE  CHICAGO  COTTAGE  CONSTRUCTION  COMPANY 
BALANCE  SHEET,  DECEMBER  31,  1918 

ASSETS 


CURRENT  ASSETS: 

Cash  and  Cash  Funds: 

Cash  in  Banks  $  45,000.00 

Cash  Deposit  with  Fiscal  Agent     2,450.00 
Deposits  on  Bids  12,500.00 


$  59,950.00 


Accounts  and  Notes  Receivable: 

Customers'  Accounts  $220,000.00 

Less — Reserve  for  Bad  Debts  13,000.00 


Sundry  Debtors 

Claims 

Due  from  Officers 

Bills  Receivable  (of  which 
$20,000  are  pledged  as  se- 
curity on  contracts  under 
way) 

Temporary  Investments: 

Illinois  Co.,  Preferred  Stock 
Liberty  Bonds 

Inventories: 

Completed  Cottages 
Merchandise  in  hands  of  Con- 
signee 
Work  in  Progress 
Raw  Materials 
Office  Supplies 

DEFERRED  CHARGES: 

Prepaid  Insurance  and  Advertising 
Prepaid  Commissions 
PrepaidL Interest 
LeaU^old 


$207,000.00 

15,878.34 

2,592.00 

5,500.00 


60,100.00   291,070.34 


7,580.00 
60,000.00 


$  15,000.00 

10,000.00 

40,000.00 

28,000.00 

1,000.00 


67,580.00 


94,000.00  $  512,600.34 


1,050.00 

8,140.00 

500.00 

850.00 


10,540.00 


Copyright,  1919,  The  Ronald  Press  Company 


INVESTMENT  OF  SINKING  FUND 

LAND,  BUILDINGS,  MACHINERY,  ETC.: 
Land 

Buildings  $200,000.00 

Machinery  140,000.00 

Tools  21,000.00 

Patterns,  Molds,  Drawings,  etc.      30,000.00 
Furniture  and  Fixtures  4,700.00 

$395,700.00 
Less — Reserve  for  Depreciation   55,250.00 


Houses  for  Employees 

PATENTS,  COPYRIGHTS,  TRADE  SECRETS  AND 
GOOD-WILL 


$80,000.00 


II-13-9 
18,107.08 


340,450.00 
46,600.00     467,050.00 


125,000.00 


$1,133,297.42 


LIABILITIES 


<3URRENT  LIABILITIES: 
Bills  Payable 
Accounts  Payable 
Bank  Loan 
Dividends  Payable 
Accrued  Taxes 

FIRST  MORTGAGE  20-YEAR  6%  BONDS 

RESERVES : 

Reserve  for  Fire  Losses 
Reserve  for  Pending  Lawsuits 

NET  WORTH: 

Preferred  Stock  Authorized  and 
Issued 

Less — Treasury  Stock 

Common  Stock,  Authorized 
Less — Unissued 

Sinking  Fund  Reserve  on  First  Mort- 
gage Bonds 
Capital  Surplus 
Surplus 


$200,000.00 
30,000.00 

$200,000.00 
10,000.00 


$100,000.00 

80,123.47 

10,000.00 

10,000.00 

976.00 


$  25,000.00 
20,000.00 


$170,000.00 


190,000.00 


18,107.08 

20,000.00 

289.090.87 


201,099.47 
200,000.00 

45,000.00 


687,197.95 
$1,133,297.42 


Copyright,  1919,  The  Ronald  Press  Company 


11-13-10 

ADJUSTING  JOURNAL  ENTRIES 

(1) 
Surplus  $  1,000.00 

To — Accounts  Payable  $  1,000.00 

To  set  up  liability  on  account  goods  invoiced 
but  not  yet  received,  being  included  in  raw 
material  inventory. 

(2) 
Raw  Material  8,000.00 

To—Surplus  8,000.00 

To  set  up  inventory  of  prepared  shingles 
improperly  charged  to  production, 

(3) 

Land  20,000.00 

To — Capital  Surplus  arising  from  donated 

land  20,000.00 

To  record  plant  site  donated. 

(4) 
Merchandise  in  hands  of  Consignee  10,000.00 

To — Accounts  Receivable  10,000.00 

To  correct  improper  charge  to  Accounts  Receiv- 
able for  merchandise  out  on  consignment. 

(5) 
Bills  Receivable  Pledged  20,000.00 

To — Bills  Receivable  20,000.00 

Notes  transferred  as  guaranty  on  contracts 
under  way. 

(6) 

Accounts  Payable  10,000.00 

To — Bank  Loan  10,000.00 

To  separate  bank  loan  from  trade  creditors. 

(7) 
Surplus  1,200.00 

To — Claims  Against  Transportation 

Companies  1,200.00 

Claim  lost. 

(8) 
Surplus  150.00 

To—Leasehold  150.00 

To  write  down  leasehold  to  present  value. 


Copyright,  1919,  The  Ronald  Press  Company 


11-13-11 

ANSWERS  TO  QUESTIONS 

Answer  to  Question  51 — 

(a)  The  two  general  classes  of  overhead  expenses  are: 

1.  General  factory  expenses,  or  factory  overhead 

2.  General  and  administrative  and  selling  expenses,  or  general  and 

selling  overhead 

(b)  Classification  of  items: 

1.  General  factory  expenses,  or  factory  overhead: 

1.  Purchasing  department  expenses 

7.  Fire  and  liability  insurance 

8.  Storekeeping  eind  receiving  expenses 

9.  Wages  paid  factory  employees  while  absent  on  account  of  illness 

11.  Defective  work 

2.  General  and  administrative  and  selling,  or  general  and  selling 

overhead. 

2.  Bad  Debts  written  off 

3.  Directors*  fees 

4.  Credit  department  expenses 

5.  Federal  corporation  tax  (this  may  also  be  considered  as  a  dis- 

tribution of  profits) 

6.  District  office  expenses 
10.  Auditing  expenses 

12.  Sample  expense 

Answer  to  Question  52 — 

Cash  $  783.47 

Depreciation  Reserve  8,264.03 

To — Equipment  $9,047.50 

To  credit  Equipment  account  with  estimated  orig- 
inal cost  of  equipment  dismantled. 

Answer  to  Question  53 — 

(a)  The  erroneous  charge  of  $3, 101.73  to  the  Plant  and  Machinery  Account  in 
respect  of  repairs  to  certain  equipment  has  the  effect  of  overstating  the  profits 
by  $2,791.56,  as  10%  of  the  amount  of  $3,101.73  had  already  been  written  off  as 
depreciation.  The  effect  on  the  balance  sheet  is  to  overstate  the  capital  assets 
$3,101.73,  the  reserve  for  depreciation  $310.17,  and  the  Surplus  Account  the 
difference  between  these  two  amounts,  or  $2,791.56.  The  adjusting  entries  to 
be  made  as  of  December  31,  1918,  in  order  to  correct  this  erroneous  distribu- 
tion, are  as  follows: 

(1) 

Repairs  and  Maintenance  $3,101.73 

To — ^Property  Account  $3,101.73 

(2) 

Reserve  for  Depreciation  310.17 

To— Depreciation  (Profit  and  Loss  Account)  310.17 

Copyright,  1919,  The  Ronald  Press  Company 


11-13-12 

(b)  The  overvaluation  of  the  inventory  at  the  close  of  the  year  by  $12,093.76 
would  have  the  effect  of  overstating  the  inventory  value  shown  by  the  balance 
sheet  in  case  the  cost  is  less  than  the  market  price.  It  would  also  result  in  a 
corresponding  overstatement  of  the  Surplus  account.  The  undervaluation  of  the 
inventory  at  the  commencement  of  the  period  by  $9,371.22  resulted  in  an  under- 
statement of  the  balance  in  the  Surplus  account  carried  forward  from  the  prior 
year. 

The  current  Profit  and  Loss  account  for  the  year  would  be  affected  by  sum 
of  both  errors  or  a  total  overstatement  of  $21,464.98. 

The  following  journal  entries  are  required  to  make  the  necessary  adjust- 
ments: 

Profit  and  Loss  Account  this  year  $12,093.76 

To — Inventory  at  close  of  this  year  $12,093.76 

To  write  off  overvaluation  of  inventory  at 
close  of  year. 

(2) 
Profit  and  Loss  this  year  9,371.22 

To — Profit  and  Loss  last  year  9,371.22 

Adjustment  on  account  of  undervaluation  of  in- 
ventory at  beginning  of  year. 

Answer  to  Question  54 — 

(a)  The  liabilities  aggregating  $13,093.22  represent  expenses  that  were 
clearly  incurred  in  and  applicable  to  the  period  prior  to  December  31,  1918,  and 
therefore  a  charge  against  the  Profit  and  Loss  Account  of  that  period.  An  entry 
should  be  made  charging  the  various  profit  and  loss  accounts  and  crediting 
outstanding  liabilities,  the  entry  to  be  reversed  as  of  the  first  of  the  succeed- 
ing month.  All  income  and  expenditure  relating  to  a  given  period  should  be  taken 
up  so  far  as  possible  in  that  period. 

(b)  The  accounting  principle  is  to  anticipate  no  profits  and  provide  for  all 
possible  losses.   In  this  case,  the  market  values  are  considerably  below  the 
cost  prices  and  the  probability  is  that  a  substantial  loss  will  be  sustained  in 
the  realization  of  the  stocks.   In  view  of  these  circumstances  it  seems  neces- 
sary that  a  reserve  be  created  by  a  charge  to  the  Profit  and  Loss  Account  in  order 
to  reduce  the  inventory  to  the  market  values  prevailing  on  or  about  December 
31,  1918. 

(c)  Generally  speaking,  the  same  principle  that  applies  to  inventory  valua- 
tions applies  to  the  valuation  of  securities  held  as  marketable  investments. 

A  reserve  of  $29,056.16  should  be  created  in  this  case  to  provide  for  the  possi- 
ble loss  on  the  sale  of  the  stocks.  In  this  connection  it  might  be  well  to  quote 
from  Mr.  Dickinson's  paper,  "Profits  of  a  Corporation,"  dealing  with  the  valua- 
tion of  investments  in  other  companies  held  as  marketable  investments: 

"The  term  Marketable  Investments  is  intended  to  include  only  such  invest- 
ments as  are  part  of  the  circulating  as  distinct  from  the  fixed  assets.   The 

Copyright,  1919,  The  Ronald  Press  Company 


11-13-13 

latter  class  of  investments  may  be  defined  as  those  which  cannot  be  disposed  of 
without  affecting  the  operations,  for  the  reason  that  the  ownership  thereof  in 
a  permanent  form  is  necessary,  however  remotely,  to  the  business  which  the  cor- 
poration is  carrying  on.   Their  valuation  would  be  governed  by  the  same  princi- 
ples as  have  been  outlined  above  for  other  fixed  assets. 

■Marketable  investments,  on  the  other  hand,  may  be  either: 

(a)  The  stock  in  trade  of  the  corporation, 

(b)  The  investment  of  surplus  cash  held  in  this  form  until  required  for 

ordinary  operating  purposes,  or 

(c)  The  investment  of  a  reserve  or  other  special  fund. 

"In  case  (a)  the  rule  of  cost  or  market  value,  whichever  is  the  lower,  applied 
to  each  individual  investment  £ind  not  to  the  group  as  a  whole,  is  undoubtedly  the 
most  conservative.   That  is  to  say,  no  profit  could  be  taken  up  on  any  invest- 
ment until  it  is  sold,  but  on  the  other  hand,  where  the  value  has  clearly  fallen, 
some  provision  should  be  made  therefor.  Where,  however,  the  investments  all 
have  a  definitely  ascertainable  market  value  at  any  time,  it  is  perhaps  fair 
and  reasonable  to  allow  a  fall  in  value  of  some  individual  investments  to  be  set 
off  against  a  rise  in  value  of  others,  provided  that  the  aggregate  valuation  is 
not  above  original  cost  or  market  value,  whichever  is  the  lower. 

"In  case  (b)  the  usual  custom  is  to  value  at  the  mean  market  price  on  the  last 
day  of  the  fiscal  period  for  the  reason  that  the  investments  represent  the 
equivalent  of  cash  and  should  therefore  be  maintained  at  their  cash  value  in  the 
balance  sheet. 

"In  case  (c)  any  profit  or  loss,  either  realized  or  estimated,  would  be  a 
credit  or  charge  to  that  fund,  and  not  to  the  Prof  it  and  Loss  Account.  But  in  the 
balance  sheet  such  investments  should  either  be  clearly  stated  as  maintained  at 
cost  or  preferably  be  adjusted  each  year  to  the  aggregate  market  value  if  below 
cost. 

■Another  method  of  dealing  with  the  fluctuations  of  marketable  investments 
of  classes  (b)  and  (c)  is  to  create  an  investment  fluctuation  reserve,  either 
out  of  estimated  or  realized  profits  on  investments,  or  by  a  charge  to  Profit 
and  Loss  of  such  an  amount  as  may  be  necessary  to  prevent  this  reserve  from 
showing  a  debit  balance,  and  by  charges  or  credits  to  this  reserve  to  maintain 
the  Asset  at  market  value.* 

Answer  to  Question  55 — 

(a)  The  relining  expenditures  of  $1,491.14  represent  ordinary  repair  and 
renewal  work  and  as  such  would  be  a  proper  charge  against  the  Profit  and  Loss 
Account.  The  necessity  for  the  relining  of  the  kettles,  as  explained  in  the 
question,  arises  every  six  months;  therefore  the  effect  of  the  expenditure  is 
simply  to  maintain  the  kettles  in  a  useful  state  without  prolonging  the  life  for 
any  considerable  length  of  time.  Where  monthly  cost  statements  are  desired  it 
would  be  essential  to  set  up  a  reserve  for  relining  kettles  by  charging  to 
each  month's  operations  an  estimated  amount  which  it  is  believed  will  be  suffi- 
cient for  this  purpose.  Relinings  when  made  would  be  charged  to  the  reserve  and 
the  unexpended  portion  would  be  constantly  carried  forward. 

(b)  Inasmuch  as  the  effect  of  the  extension  is  "to  effect  a  saving  in  the 
cost  of  and  to  increase  the  production"  the  cost  thereof  may  be  charged  to  the 

Copyright,  1919,  The  Ronald  Press  Company 


11-13-14 

capital  account.  But  the  wall  torn  down  represents  dismantled  property  and 
therefore  should  be  deducted  from  the  capital  account  and  charged  to  the  depre- 
ciation reserve  at  its  original  cost.   The  expenditure  involved  in  dismantling 
the  wall  is  also  chargeable  to  the  depreciation  reserve.  Where  the  amount 
involved  is  small  it  is  oftentimes  charged  direct  to  operating  expense. 


CONSTRUCTION  OF  STATEMENT  OF  PROFIT  AND  LOSS 

A  statement  of  profit  and  loss  accompanying  a  balance  sheet  is  referred  to 
as  a  "relative"  statement,  but  this  expression  gives  only  an  inkling  of  the  real 
connection  between  the  two.  Since  a  relative  statement  of  profit  and  loss  covers 
the  period  immediately  preceding  the  date  of  the  balance  sheet  it  is  apparent 
that  any  changes  in  the  valuation  of  balance  sheet  items  will  be  reflected  in  the 
charges  or  credits  to  the  Profit  and  Loss  Account. 

RELATION  TO  SURPLUS  ACCOUNT— Frequently  it  will  be  found  that  losses  have 
been  incurred  during  the  year  applying  to  preceding  periods,  such  as  inventory 
losses,  additional  federal  taxes  and  other  expenses  not  ascertainable  at  the 
time  the  previous  balance  sheet  was  prepared.  These  items  as  incurred  will  be 
charged  to  surplus  (or,  better,  to  a  profit  and  loss  adjustment  account  for  the 
previous  period),  unless  very  small  in  amount,  in  which  case  they  are  commonly* 
included  among  current  expenses.  Any  such  changes  in  surplus  may  be  made  the 
subject  of  a  separate  statement  in  preparing  the  exhibits  or  may  be  added 
directly  to  the  statement  of  profit  and  loss  unless  the  latter  thereby  becomes 
too  unwieldy. 

The  difference  in  the  Surplus  accounts  on  successive  balance  sheets  should 
therefore  be  clearly  accounted  for  in  the  exhibits. 

POINTS  INVOLVED  IN  CONSTRUCTING  THE  STATEMENT— It  seems  desirable  at  this 
point  to  review  some  of  the  principles  of  construction  applying  to  profit  and 
loss  statements  which  should  be  borne  in  mind  in  their  preparation: 

1.  GENERAL — Simplicity  of  arrangement,  brevity,  and  clarity  are  the  out- 
standing requirements  of  a  good  profit  and  loss  statement.  The  report  form  is 
preferable  to  the  account  form.   Supplementary  or  supporting  exhibits,  cover- 
ing such  details  as  gross  profits  by  departments,  cost  of  sales,  and  selling 
and  general  expenses,  may  be  introduced  should  the  more  detailed  analysis  be 
warranted.   The  nomenclature  of  the  various  items  should  leave  no  doubt  as  to 
the  significance  thereof,  explanatory  remarks  being  inserted  either  directly 
after  the  item  or  in  the  form  of  a  footnote.  The  point  never  to  be  lost  sight  of 
is  that  a  profit  and  loss  statement  is  prepared  for  the  purpose  of  conveying 
information  and  that  it  is  the  duty  of  the  accountant  to  present  this  informa- 
tion in  the  best  possible  manner. 

2.  SALES — An  analysis  of  sales  is  of  prime  importance,  inasmuch  as  it  is 
desirable  to  analyze  increases  and  decreases  and  unprofitable  departments.  A 
sales  analysis  may  signify  an  analysis  by  months,  by  articles  or  departments,  by 
districts  in  which  sales  are  made,  etc.  Any  of  these  analyses  or  a  combination 
of  two  or  more  of  them  may  be  utilized  for  an  exhibit  accompanying  a  statement 

Copyright,  1919,  The  Ronald  Press  Company 


11-13-15 

of  profit  and  loss.  In  an  audit  report  the  analyses  may  appear  in  the  text  of  the 
report,  or  graphic  methods  may  be  resorted  to  (see  Montgomery,  page  277). 

3.  COST  OF  SALES — A  cost  of  sales  analysis  may  be  prepared  along  the  same 
lines  as  a  sales  analysis  and  included  therewith  in  a  single  exhibit.  In  addi- 
tion, where  there  are  manufacturing  operations,  a  separate  exhibit  should  be 
prepared  showing  materials  used,  direct  labor,  and  factory  expenses  in  detail, 
preferably  arranged  in  comparative  form  with  the  same  items  of  the  next  preced- 
ing period  or  periods. 

4.  MISCELLANEOUS  INCOME — Most  businesses  have  small  amounts  of  miscella- 
neous income  each  year  which  should  not  be  included  in  sales.  Sales  of  equip- 
ment or  other  property  exceeding  the  cost  thereof  less  depreciation,  sales  of 
scrap  not  essentially  a  by-product,  incoae  from  investments,  income  from  de- 
partments not  operated  primarily  for  profit,  and  other  similar  items  will  be 
found  under  this  heading.  Usually  supporting  exhibits  are  unnecessary. 

5.  SELLING  AND  GENERAL  EXPENSES— The  details  of  these  expenses  are  usually 
set  forth  in  separate  exhibits  arranged  in  comparative  form. 

6.  INTEREST — Interest  received  from  customers*  notes  and  temporary  invest- 
ments may  be  considered  as  a  miscellaneous  income,  or  as  a  financial  rather  than 
operating  earning.  The  same  applies  to  interest  paid. 

REFERENCES : 

Dickinson,  Chapter  III 

Kester,  Chapters  XXII,  XXVI,  and  XXVII 

Hatfield,  Chapters  XI  and  XII 


Copyright,  1919,  The  Ronald  Press  Company 


II-14-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 

Lecture  14 

FOREIGN  EXCHANGE 


Problem  32 

A  and  B,  with  a  head  office  in  Chicago,  open  a  branch  in  London,  England. 
The  branch  obtains  its  goods  from  the  head  office,  and  elsewhere,  on  personal, 
consignment,  and  joint  account.  Whenever  funds  warrant  it,  drafts  (free)  are 
drawn  for  shipments.  A  record  of  assets  and  liabilities  is  kept  on  the  branch 
books,  and  all  bills,  expenses,  etc.,  incurred  by  the  branch,  are  paid  directly 
by  the  branch.  The  Profit  and  Loss  account  is  closed  every  six  months,  and 
monthly  reports  are  sent  to  the  head  office, 

SUMMARY  OF  TRANSACTIONS 

1.  A  and  B  invested  $480,000  in  the  branch  house,  which  A  remitted  to- London 
at  the  rate  of  4.80  exchange. 

2.  B,  in  London,  purchased  office  equipment,  etc.,  amounting  to  £5,000.0.0. 

3.  A  shipped  goods  on  consignment  amounting  to  $240,000,  drawing  a  free 
draft  for  £25,000.0.0,  receiving  4.80  exchange. 

4.  B  purchased  £40,000.0.0  worth  of  goods  on  credit  from  Brown  Brothers, 
London,  and  sold  one-half  of  the  purchase  on  account  for  £25,000.0.0. 

5.  B  established  a  petty  cash  fund,  £1,000.0.0. 

6.  A  shipped  goods  to  B  on  personal  account,  valued  at  $47,500,  drawing  a 
draft  for  the  full  amount  @  4.75. 

7.  A  shipped  goods  to  B,  valued  at  $47,600,  drawing  for' £10,000.0.0  against 
the  shipment  @  4.76. 

8.  B  sold  one-half  of  the  shipment  in  (3)  for  £30,000.0.0  cash,  and  after 
deducting  3%  commission  and  £100  expenses,  remitted  the  balance  at  4.75. 

9.  A  decided  to  withdraw  $380,000  of  the  amount  originally  advanced,  and  B 
remitted  at  4.75  exchange. 

10.  A  transferred  to  Investment  account  that  portion  represented  in  perma- 
nent expenditure,  £5,000.0.0  @  4.80. 

From  the  above  information  prepare: 

(a)  Journal  entries  necessary  to  record  the  transactions  on  the  books 

of  both  the  breuich  and  home  office. 

(b)  Statements  of  the  control  accounts  on  the  books  of  both  the  branch 

and  home  office,  showing  the  balance  due  the  branch  office  in 
terms  of  domestic  (U.  S. )  currency,  the  current  rate  of  exchange 
at  the  time  of  preparing  these  statements  being  4.75. 


Copyright,  1919,  The  Ronald  Press  Company 


II-14-2 

Problem  33 

The  following  statements  were  prepared  from  the  books  of  the  home  and  branch 
offices  respectively  and  show  the  inter-office  transactions  taken  up  on  the 
books  of  both  offices: 

PREPARED  FROM  BRANCH  OFFICE  BOOKS 
STATEMENT  OF  HEAD  OFFICE,  CURRENT  ACCOUNT 


DEBITS 

Payment  to  the  American 
Steel  Works  on  account 
of  charges  for  steel  pur- 
chased by  the  home  office   $  4,000.00 

Telegraph  and  other  charges 
during  the  period  charge- 
able to  the  home  office        304.77 

Balance  at  end  of  period      18,808.05 


CREDITS 
Balance  as  per  last  state- 
ment rendered 
Balance  of  Profit  and  Loss 

Account  for  the  year 
Taxes  and  other  expenses  paid 
by  the  home  office 


$23,112.82 


510,931.78 

11,047.93 

1,133.11 

$23,112.82 


PREPARED  FROM  HOME  OFFICE  BOOKS 
STATEMENT  OF  BRANCH  OFFICE,  CURRENT  ACCOUNT 


DEBITS 

Balance  as  per  last  state- 
ment rendered  $10,931.78 

Taxes  and  other  expenses  paid 
on  account  of  branch  office 

Merchandise  shipped  to  the 
branch  office 

Cash 

Advances  to  the  branch  man- 
ager on  account  of  travel- 
ing expenses 


1,133.11 

2,103.41 
5,000.00 


450.00 


$19,618.30 


CREDITS 
Balance  at  end  of  period 


$19,618.30 


$19,618.30 


Prepare  a  statement  showing  a  reconciliation  of  the  two  inter-office  ac- 
coimts.  Also  journal  entries  to  adjust  head  office  and  branch  office  books. 


Copyright,  1919,  The  Ronald  Press  Company 


II-14-3 

MISCELLANEOUS  QUESTIONS 

Question  66 — 12xplain  the  method  of  reconciling  the  control  account  on  the 
home  office  books  with  the  control  account  on  the  foreign  branch  office  books. 

Question  67 — What  rate  of  exchange  would  you  use  in  converting  the  follow- 
ing items  into  American  currency  for  the  purpose  of  consolidating  the  figures 
with  the  New  York  head  office  statement? 

LONDON  TRIAL  BALANCE 

New  York  office  £100,000 
Remittances                                          £  50,000 

Cash  5,000 

Customers*  Accounts  75,000 

Inventory  at  beginning  25,000 

Furniture  and  Fixtures  1,000 

Creditors*  Accounts  31,000 

Sales  150,000 

Purchases  95,000 

Expenses  30,000 


£281,000  £281,000 


Question  68 — Formulate  entries  in  respect  of  the  following: 

(a)  Preferred  stock  of  $1,000,000  taken  up  by  issue  of  first  mortgage 

6%  bonds  of  same  value,  per  resolution  adopted  by  stockholders 

(b)  Preferred  stock  of  $100,000  retired  at  105,  in  accordance  with  the 

terms  and  conditions  under  which  the  stock  was  sold  in  the  first 
instance 

Question  69 — Prepare  the  necessary  journal  and  cash  book  entries  in  respect 
of  the  following  transactions: 

(a)  Sale  of  $350,000  of  preferred  stock  of  the  R  Mfg.  Co.  at  115,  with 

the  proviso  that  no  part  of  the  premium  is  available  for  dividends 

(b)  Retirement  on  July  1,  1919,  of  $300,000  first  mortgage  6%  bonds 

maturing  on  July  1,  1920,  at  102-1/2  in  accordance  with  the  terms 
and  conditions  of  the  trust  deed  covering  the  property  securing 
the  bonds 

Question  70 — How  should  the  following  be  dealt  with  in  a  balance  sheet  pre- 
pared as  of  December  31? 

(a)  First  mortgage  Q%   bonds,  $200,000,  put  up  as  collateral  for  bank 

loans  of  $150,000 

(b)  Of  total  accounts  receivable  of  $198,093.11,  $125,000  are  in  dis- 

pute 

Copyright,  1919,  The  Ronald  Press  Company 


I 1-14-4 


Solution  to  Problem  28 


(1) 
Work  in  Progress  Controlling  Account 

ORDER  NO.  AMOUNT 

138  $13,013.24 

140  1,039.23 

178  9,113.27 

196  8,302.95 

185  15,992.04 

137  18,047.03 


$65,507.76 


To — General  Stores  Department 
Materials  consumed  during  the  month  of  March  as 
per  report  of  general  stores  department. 


$65,507.76 


(2) 


Work  in  Progress  Controlling  Account 


ORDER  NO. 

AMOUNT 

137 

$  3,098.11 

140 

4,037.02 

178 

9,172.09 

193 

11,027.04 

196 

1,083.27 

185 

31,037.27 

138 

19,039.83 

78,494.63 


To — Foundry  Department 
Castings  made  during  the  month  of  March  as  per 
report  of  foundry  department. 


78,494.63 


(3) 
Work  in  Progress  Controlling  Account 

ORDER  NO.         AMOUNT 

138  $  9,037.31 

140  11,049.02 
178  3,073.27 

196  7,325.33 

185  13,071.32 
137  1,990.00 


To — Pay-Roll  or  Wages  Account 
Productive  labor  for  month  of  March. 


45,546.25 


45,546.25 


Copyright,  1919,  The  Ronald  Press  Company 


II-14-5 


(4) 

Work  in  Progress  Controlling  Account         $  21,037.11 

ORDER  NO.  AMOUNT 

138  $4,174.19 

140  5,103.37 

178  1,419.50 

196  3,383.46 

185  6,037.44 
137  919.15 


To — Indirect  Factory  Expenses  $  21,037.11 

Distribution  of  factory  expenses  for  month  over 
orders  on  ratio  which  the  productive  labor 
charged  to  each  order  bears  to  the  total  pro- 
ductive labor. 

(5) 
Finished  Products,  Controlling  Account         156,685.57 

To — Work  in  Progress  Controlling  Account  156,685.57 

Orders  completed  during  month  of  March. 

(6) 
Cost  of  Goods  Sold  156,685.57 

To — Finished  Products  Controlling  Account  156,685.57 

Entry  in  respect  of  cost  values  of  the  fol- 
lowing orders  shipped  during  the  month 
of  March: 

PRODUCTIVE  INDIRECT. 
ORDER  NO.   MATERIALS  CASTINGS     LABOR    EXPENSES     TOTAL 

137  $18,047.03  $  3,098.11  $  1,990.00  $   919.15  $  24,054.29 

138  13,013.24  19,039.83  9,037.31  4,174.19  45,264.57 
140  1,039.23  4,037.02  11,049.02  5,103.37  21,228.64 
185      15,992.04  31,037.27  13,071.32   6,037.44   66,138.07 


$48,091, 

.54  $57,212.23  $35,147.65  $16,234.15  $156,685.57 

(7) 

Customers*  Accounts 

$170,000.00 

To — Sales 

$170,000.00 

To  record  the  shipment  of  the  following 

orders: 

ORDER  NO. 

SELLING  PRICE 

137 

$  40,000.00 

138 

50.000.00 

140 

20,000.00 

185 

60,000.00 

$170,000.00 

Copyright,  1919,  The  Ronald  Press  Company 


11-14-6 


ORDER  NO. 
178 
196 
193 


CHICAGO  MACHINERY  MANUFACTURING  CO. 
SUMMARY  OF  ORDERS  IN  PROCESS 
AT  MARCH  31,  19— 


MATERIALS 

\   9,113.27 

8,302.95 


CASTINGS 
$  9,172.09 
1,083.27 
11,027.04 


PRODUCTIVE 

LABOR 
$  3,073.27 
7,325.33 


INDIRECT 

EXPENSES 

$1,419.50 

3,383.46 


TOTAL 
$22,778.13 
20,095.01 
11,027.04 


$17,416.22     $21,282.40     $10,398.60     $4,802.96     $53,900.18 


SALES 

COST  OF  SALES: 
Castings 
Stores  Used 


Productive  Labor 
Factory  Expenses 

Total 

GROSS  PROFIT 


CHICAGO  MACHINERY  MANUFACTURING  CO. 
GROSS  PROFIT  ON  ORDERS  SHIPPED 
DURING  THE  MONTH  OF  MARCH,  19— 

NO.  137     NO.  138     NO.  140     NO.  185 
$40,000.00  $50,000.00  $20,000.00  $60,000.00 


$  3,098.11  $19,039.83  $  4,037.02  $31,037.27 
18,047.03   13,013.24    1,039.23   15,992.04 


$21,145.14  $32,053.07  $  5,076.25  $47,029.31 

1,990.00    9,037.31   11,049.02   13,071.32 

919.15    4,174.19    5,103.37    6,037.44 


TOTAL 

$170,000.00 


$  57,212.23 
48,091.54 

$105,303.77 
35,147.65 
16,234.15 


$24,054.29  $45,264.57  $21,228.64  $66,138.07  $156,685.57 


$15,945.71  $  4,735.43  $  1,228.64*  $  6,138.07*  $  13,314.43 


*  Red  to  indicate  loss. 


Copyright,  1919,  The  Ronald  Press  Company 


II-14-7 

} 
Solution  to  Problem  29 

ROCKWELL  MANUFACTURING  CO. 

STATEMENT  SHOWING  APPLICATION  OF  FUNDS  PROVIDED 

DURING  YEAR  ENDING  DECEMBER  31,  1918 

FUNDS  PROVIDED:  , 

Proceeds  from  the  sale  of: 

Capital  Stock  $150,000.00 

First  Mortgage  Q%  Bonds  100,000.00  !|250,000.00 


Net  Profits,  as  per  Statement  of  Profits  and  Income  95,000.00 


OR  A  TOTAL  OF  $345,000.00 


WHICH  WERE  APPLIED  IN  THE  FOLLOWING  MANNER: 
Expenditures  for: 

Land  $  50,000.00 

Buildings  100,000.00 

Machinery  and  Equipment  145,000.00  $295,000.00 


Dividends  declared  and  paid  50,000.00 


(As  above)  $345,000.00 


NOTE — There  was  no  increase  in  the  working  capital  of  the  company  during  the 
year.  However,  the  following  comparative  table  will  bQ  of  interest: 

DECEMBER  31 

ASSETS                   1917        1918        INCREASE  DECREASE 

Inventories                 $160,000.00  $231,000.00   $71,000.00  $ 

Customers'  Accounts  and  Notes 

Receivable                275,000.00   264,000.00    11,000.00 

Sundry  Debtors               25,000.00    28,000.00     3,000.00  

Cash  on  Hand  and  in  Bank       35,000.00    32,000.00    3,000.00 


$495,000.00  $555,000.00    $74,000.00  $14,000.00 
Deduct — Current  Liabilities   250,000.00   315,000.00    65,000.00 


Net  Working  Capital      $245,000.00  $240,000.00    $74,000.00  $79,000.00 
Deferred  Charges  15,000.00    20,000.00     5,000.00   


Total  Working  Capital 

and  Deferred  Charges   $260,000.00  $260,000.00    $79,000.00  $79,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-14-8 

ANSWERS  TO  QUESTIONS 

Answer  to  Question  56 — The  book  value  of  a  share  of  capital  stock  is  the  amount 
which  the  holder  will  be  entitled  to  receive  as  of  a  certain  date  in  case  all 
assets  are  realized  at  their  book  values. 

In  the  case  of  preferred  stock  the  book  value  is  the  par  value  plus  dividends 
in  arrears,  if  any. 

In  the  case  of  common  stock  the  book  value  consists  of  the  common  stock, 
surplus  and  surplus  reserves,  less  preferred  stock  dividends  in  arrears,  if  any. 

The  figures  may  be  obtained  from  the  balance  sheet.  Thus,  in  the  solution 
of  Problem  26,  Lecture  11,  we  may  ascertain  the  book  value  of  common  stock  as 
follows: 

Common  Stock  issued  and  outstanding  $190,000.00 

Surplus  289,090.87 

Capital  Surplus  20,000.00 

Sinking  Fund  Reserve  18,107.08 


$517,197.95 

which,  divided  by  1,900  (the  shares  outstanding),  gives  a  book  value  of 
$272.21  per  share. 

Answer  to  Question  57 — 

(a)  Interest  on  borrowed  money  is  not  a  proper  item  to  include  as  part  of  the 
cost  to  manufacture,  because  interest  is  one  form  of  profit.  The  effect  of  in- 
cluding such  interest  in  the  cost  of  manufacture  is  to  include  part  of  the 
profits  in  costs,  and  consequently  in  inventories  to  the  extent  that  goods  re- 
main on  hand. 

(b)  General  administrative  expenses  are  not  proper  expenditures  to  be  in- 
cluded in  manufacturing  cost.  It  is  oftentimes  difficult  to  classify  charges 
as  between  factory  overhead  and  general  overhead.  But  if  the  expenditure  is 
classed  as  a  general  overhead  it  should  be  excluded  from  cost  of  production. 

(c)  At  present  there  is  considerable  difference  of  opinion  as  to  the  pro- 
priety of  including  rent  and  the  allied  item  of  interest  on  the  investment  in 
factory  facilities  as  part  of  production  cost.  This  subject  is  treated  in  detail 
in  cost  accounting.   However,  from  the  auditor's  point  of  view,  it  is  gener- 
ally held  that  these  items  must  be  excluded  in  determining  the  inventory  valua- 
tion for  balance  sheet  purposes,  and  in  arriving  at  the  surplus  net  profits  for 
the  fiscal  period. 

Answer  to  Question  58 — 

(a)  Work  done  by  outside  contractors  should  be  charged  to  property  at  the 
contract  prices.  Examine  the  contract  and  engineer's  estimate  of  cost. 

(b)  Work  done  by  company  should  be  charged  to  property  on  a  factory  cost 
basis.  -Examine  the  storeroom  slips  showing  the  purpose  for  which  materials  were 
issued.  Examine  time  cards  as  to  time  spent  on  the  construction.  Note  the 
method  followed  in  apportioning  burden  to  the  job. 

Copyright,  1919,  The  Ronald  Press  Company 


II-14-9 

(c)  Ascertain  cost  valuo  of  old  engine  and  credit  same  to  Property  Account. 
Charge  Scrap  with  its  estimated  realizable  value  and  the  balance  to  Deprecia- 
tion Reserve.   The  new  engine  should  be  charged  to  Property  at  cost.  Cost  in 
this  case  would  be  represented  by  the  invoice  price  of  the  engine,  freight  and 
cartage  to  the  plant,  and  the  expense  of  installing  and  testing. 

Answer  to  Question  59 — 

(a)  The  payments  of  583,150  should  be  charged,  pending  the  completion  of 
the  work,  to  a  "Construction  Work  in  Progress"  account.  All  liabilities  in 
respect  of  completed  and  accepted  construction  work  should  be  taken  up  in  the 
books  as  and  when  they  accrue.  As  soon  as  the  construction  work  is  completed  an 
entry  should  be  made  crediting  the  Construction  Work  in  Progress  Account  and 
debiting  the  various  detailed  property  accounts.  The  expenditures  up  to  the 
date  of  the  balance  sheet  should  be  classified  under  the  general  heading  of 
Property  Assets  along  with  all  other  assets  coming  under  that  classification. 
It  might  also  be  mentioned  that  materials  purchased  and  on  hand  to  be  used  solely 
for  construction  purposes  should  be  classified  in  the  balance  sheet  as  part 

of  the  property  assets. 

(b)  Outstanding  liabilities,  $33,103.11.   Liabilities  incurred  in  respect 
of  construction  work  completed  and  accepted  prior  to  December  31,  1918,  are 
outstanding  obligations  at  that  date  and  must  be  taken  into  consideration  in 
arriving  at  the  financial  position  of  the  company.  The  failure  to  provide  for 
the  same  has  the  effect  of  understating  the  fixed  or  property  assets  and  like- 
wise the  current  liabilities. 

Answer  to  Question  60 — 

Cash  19,000.00 

Reserve  for  Depreciation  400.00 

Profit  and  Loss  600.00 

To— Machinery  $10,000.00 

To  record  sale  of  machine  and  the  loss  result- 
ing therefrom. 

FOREIGN  EXCHANGE 

GENERAL  NATURE  OF  THE  PROBLEM — Foreign  exchange  is  a  system  whereby  commer- 
cial nations  discharge  their  debts  to  one  another.   Indebtedness  may  repre- 
sent: 

1.  Value  of  commodities  exported  to  or  imported  from  other  countries 

2.  Money  borrowed,  loaned,  or  invested  abroad 

3.  Interest  or  profits  on  money  borrowed,  loaned,  or  invested  abroad 

4.  Cost  of  trfinsportation  of  goods  and  commission  for  service 

5.  Expense  incurred  in  traveling  in  foreign  countries 

6.  Any  transaction  which  involves  the  exchange  of  money  between  countries 

These  debts  must  be  paid  in  cash  or  something  equally  satisfactory  to  the  cred- 
itors. Because  of  the  cost  and  risk  of  transmitting  gold  or  currency  the  sys- 
tem of  exchanging  debts  through  the  medium  of  commeroial  paper  has  been 
developed. 

Copyright,  1919,  The  Ronald  Press  Company 


11-14-10 

SIGNIFICANCE  OF  GOLD— Gold,  by  virtue  of  its  commercial  usage  and  the  laws 
of  the  various  countries  of  the  world,  may  be  said  to  be  the  only  international 
money  whose  purchasing  power  is  practically  the  same  throughout  the  civilized 
world.   Gold  is  the  only  commodity  the  value  of  which  is  permanently  estab- 
lished by  law.   Its  price  cannot  be  affected  by  either  an  abundance  or  scarcity 
of  the  supply.   The  price  of  diamonds — more  valuable  than  gold — is  affected  by 
the  law  of  supply  and  demand.  Silver,  the  monetary  standard  in  some  countries, 
fluctuates  in  value  in  the  ssime  manner  as  any  other  commodity. 

PAR  OF  EXCHANGE — The  "mint  par  of  exchange ^  between  two  countries  may  be 
obtained  by  dividing  the  weight  of  the  pure  gold  in  the  gold  unit  of  one  country 
by  the  weight  of  the  pure  gold  in  the  gold  unit  of  the  other  country.  The  mint 
par  of  exchange  between  two  gold  standard  countries  does  not  vary;  but  as 
between  countries  where  one  or  both  have  a  silver  or  part  silver  standard 
there  is  a  constant  fluctuation.   For  example,  the  mint  par  of  exchange  be- 
tween the  United  States  and  Great  Britain  is  $4.86656,  and  is  arrived  at  as  fol- 
lows: A  gold  dollar  (U.S.  unit)  weighs  25.8  troy  grains  and  is  9/10  fine,  1/10 
consisting  of  an  alloy  which  increases  its  durability.  The  pure  gold  content  is 
therefore  23.22  troy  grains.  A  British  sovereign  contains  123.274478  troy 
grains,  11/12  fine,  or  113.001603  troy  grains  of  pure  gold.   Dividing 
113.001603  by  23.22  gives  $4.86656 — the  worth  of  the  sovereign  in  our  money. 

The  "commercial  par  of  exchange"  is  the  mint  par  plus  the  transportation 
cost  of  its  gold  equivalent.   In  the  case  of  the  sovereign  this  might  be  about 
4.88. 

RA.T5  OF  EXCHANGE — The  rate  which  bankers  and  exporters  quote  on  foreign 
remittances  is  called  the  rate  of  exchange.  The  rate  of  exchange  between  any 
two  countries  is  for  drafts,  checks,  or  bills  of  exchange;  and  the  price  in- 
cludes, beside  the  actual  equivalent  of  the  standard  coin,  some  allowance  for 
interest,  according  to  the  terms  of  the  drafts,  and  a  premium  which  the  seller 
demands  for  the  economy  and  superior  convenience  of  his  draft  or  check  as  com- 
pared with  a  remittance  in  currency  or  bullion.   This  premium  varies  more  or 
less  according  to  the  amount  of  exchange.  Discount  rates  at  London,  Paris,  and 
other  centers  are  the  rates  at  which  commercial  paper  of  the  different  classes 
may  be  discounted,  i.e.,  before  maturity. 

ACCOUNTING  PROBLEM  OF  FOREIGN  EXCHANGE — The  accounting  problem  involved  in 
foreign  exchange  transactions  varies  according  to  the  character  of  the  business 
relations  existing.   Taking  the  relations  between  a  home  and  branch  office  as 
being  the  most  complex,  operations  may  be  carried  on  as  follows: 

1.  Selling  to  or  buying  from  a  foreign  concern,  all  billing  to  be  done  in 
domestic  currency  or  all  in  foreign  currency 

2.  Selling  to  or  buying  through  a  foreign  branch,  the  method  of  doing  busi- 
ness on  the  part  of  the  branch  being  any  of  the  following: 

(a)  Branch  sells  to  customers ;  proceeds  collected  by  home  office  ;  or 

branch  collects  proceeds  itself 

(b)  Branch  buys  only  from  head  office ;  or  from  head  office  and  other 

dealers  as  well ;  branch  may  even  carry  on  its  own  manufacturing 
('c)  Branch  pays  its  own  bills;  or  same  are  paid  by  home  office 

There  are  many  such  methods  of  procedure. 

Copyright,  1919,  The  Ronald  Press  Company 


11-14-11 

The  problem  which  enters  into  the  accounting  of  foreign  transactions  is 
that  of  reflecting  on  the  books  or  in  the  statements  prepared  from  the  books  the 
conversion  of  foreign  currency. 

In  the  case  of  trsmsactions  with  a  foreign  concern  where  the  billing  is  in 
domestic  currency  there  is  no  problem  involved  other  than  the  usual  one  in  sim- 
ilar transactions  with  domestic  concerns.  However,  where  the  billing  is  done 
in  foreign  currency  it  becomes  necessary  to  carry  extra  ledger  columns  in  the 
account  of  the  party  involved.   Sometimes  a  conversion  is  made  only  at  the 
time  of  billing.   In  case  a  market  rate  of  exchange,  different  from  that  used 
in  converting  the  billing  prevails,  which  will  of  course  affect  the  amount  of 
domestic  currency  received,  the  difference  above  or  below  the  billing  amount 
may  be  charged  or  credited  to  a  nominal  account  often  called  "Profit  or  Loss 
on  Exchange." 

Where  transactions  are  with  a  branch  located  in  a  foreign  country,  then 
either  the  foreign  accounts  may  be  kept  by  and  at  the  home  office,  or  at  the 
branch  itself.   In  the  event  of  billing  being  done  in  domestic  currency,  then 
no  other  arrangement  than  perhaps  that  of  separating  the  foreign  accounts 
from  the  domestic  accounts  in  the  ledger  need  be  resorted  to;  this,  of  course, 
referring  to  a  case  where  the  home  office  keeps  the  books.  Where  billing  is 
done  and  transactions  are  in  terms  of  foreign  currency,  then  a  separate  set  of 
books  must  be  kept,  either  by  the  home  office,  or  the  branch — and  by  "set"  is 
meant  the  books  of  original  entry,  journal,  cash  book,  etc.,  as  well  as  a  ledger. 
Transactions  recorded  therein  will  be  in  foreign  currency.   Transactions  be- 
tween the  branch  and  home  office  will  be  represented  by  "control"  accounts  on 
both  the  home  office  and  branch  books. 

Thus  far  has  been  discussed  the  actual  bookkeeping  in  connection  with  for- 
eign exchange.   Another  important  problem  is  of  consolidating  the  accounts 
in  one  currency  with  those  in  another.  Briefly  stated  the  following  governs: 

1.  Where  the  rate  of  exchange  is  sufficiently  stable  it  is  usual  to  convert 
the  accounts  on  a  fixed  basis,  in  which  case  the  only  difference  in  exchange  will 
arise  in  connection  with  remittances. 

2.  Where  the  exchange  is  of  a  fluctuating  character,  foreign  accounts 
should  be  converted  as  follows: 

(a)  Fixed  assets  at  original  rate  acquired 

(b)  Floating  or  current  assets  and  liabilities  at  the  rate  on  day  of 

balance  sheet 

(c)  Revenue  items  at  the  average  rate  of  the  period  covered  by  the 

accounts 

(d)  Remittances  at  the  actual  rate 

(e)  Control  balances  at  the  same  rate  as  that  which  had  been  established 

on  the  head  office  books  at  the  last  period.  The  difference  in 
this  amount  and  that  on  the  head  office  control  account  will 
represent  loss  or  gain  in  exchange  to  be  carried  to  the  Profit 
and  Loss  account.   Sometimes,  however,  this  is  carried  in  a  re- 
serve account. 

Journal  entries  to  place  the  results  of  the  branch  on  the  books  of  the  head 
office  should  be  made  using  the  rate  above  mentioned. 
REFERENCES : 

Dicksee,  Advanced  Accounting,  pages  29-35 
Kester.  Vol.  2,  Chapter  XXXI 

Copyright,  1919,  The  Ronald  Press  Company 


II-15-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  15 
GENERAL  REVIEW 


Problem  34 

The  United  States  Cement  Co.  was  formed  on  July  1,  1917,  and  the  following 
trial  balance  was  abstracted  from  the  books  at  the  close  of  its  first  fiscal 
year,  or  June  30,  1918, 


Capital  Stock  issued  and  outstanding 

First  Mortgage  6%  Bonds  dated  July  1,  1917 

Real  Estate 

Buildings 

Machinery 

Tools  and  Equipment 

Heat  and  Power 

Mill  Labor 

Factory  Expenses 

Customers'  Accounts 

Raw  Materials  Purchased 

Office  Salaries  and  Expenses 

Notes  Receivable 

Storekeeper  (representing  the  purchases  of  supplies  and 

spare  parts) 
Petty  Cash  Fund 
Cash  in  bank 
Sales 

Accounts  Payable 
Bills  Payable 
Discounts  Received 
Discounts  Allowed 

Interest  on  Bills  Receivable,  Bank  Balances,  etc. 
Interest  on  Bills  Payable 


DEBITS 


$  66,000.00 

180,000.00 

285,000.00 

10,000.00 

4,200.00 

27,600.00 

2,550.00 

79,350.00 

150,000.00 

5,175.00 

11,350.00 

9,500.00 

250.00 

12,600.00 


CREDITS 
$450,000.00 
100,000.00 


1,400.00 
3,000.00 


184,875.00 

48,000.00 

63,000.00 

1,200.00 

900.00 


$847,975.00  $847,975.00 


The  following  items  will  have  to  be  taken  into  consideration  in  arriving  at 
the  financial  position  of  the  company  at  June  30,  1918,  and  the  results  of  opera- 
tion for  the  year  ending  on  that  date: 

1.  Depreciation  on  buildings  at  2J4%  per  annum;  on  machinery,  7HJ6  per 

annum;  and  on  tools  and  equipment,  10%  per  annum 

2.  Accrued  wages  of  workmen  $1,875;  accrued  taxes  $750;  and  accrued 

interest  on  bills  payable  of  $875 


Copyright,  1919,  The  Ronald  Press  Company 


II-15-2 


3.  Reserve  for  bad  and  doubtful  accounts  of  1%  on  the  sales  for  the 

year 

4.  Of  the  total  materials  and  supplies  purchased  and  charged  to  the 

storekeeper,  $7,400  was  used  (per  storekeeper's  reports)  in  con- 
nection with  the  manufacture  of  cement.  The  balance  is  still  on 
hand. 

5.  Accrued  interest  on  First  Mortgage  6%  Bonds,  payable  July  1,  1918 

6.  Inventory  of  cement  on  hand  June  30,  1918 

Prepare  the  following: 

(a)  Statement  showing  cost  of  cement  produced  (250,000  barrels)  for 

the  year  and  the  average  cost  per  barrel 

(b)  Finished  Product  Account  (30,000  barrels  on  hand  June  30,  1918) 

(c)  Balance  Sheet  at  June  30,  1918 

(d)  Statement  of  Profit  and  Loss  Account  for  the  year  ending  June  30,  1918 


GENERAL  REVIEW  QUESTIONS 


Question  71 — 


(a)  State  the  purpose  for  which  a  statement  of  affairs  is  prepared; 

a  realization  and  liquidation  account. 

(b)  Draft  the  forms  you  would  use  if  called  upon  to  prepare  either  of 

these  statements.    . 

Question  72 — Draft  the  entries  required  to  close  the  books  of  a  liquidating 
corporation  after  the  final  dividend  has  been  paid  to  the  creditors. 

Question  73 — Distinguish  between  the  following  operating  statements: 

(a)  Statement  of  profits  and  income 

(b)  Statement  of  profit  and  loss  account 

(c)  Manufacturing,  trading,  and  profit  and  loss  account 

(d)  Revenue  statement 

(e)  Profit  and  loss  account 

(f)  Statement  of  receipts  and  disbursements 

(g)  Statement  of  income  and  expense 

Question  74 — Draft  the  forms  generally  used  for: 

(a)  Statement  of  profits  and  income 

(b)  Manufacturing,  trading,  and  profit  and  loss  account 

Question  75 — 

(a)  Give  the  entries  required  to  set  up  a  Manufacturing  Account  and  a 

Cost  of  Sales  Account 

(b)  What  is  the  balance  of  each  of  these  accounts  supposed  to  represent? 

Question  76 — Give  the  entries  required  to  open  the  books  of  a  new  partnership. 
Copyright,  1919,  The  Ronald  Press  Company 


II-15-3 

Question  77 — Give  the  entries  required  to  close  the  books  of  a  partnership 

(a)  At  the  end  of  a  fiscal  period 

(b)  On  dissolution  due  to  death  of  a  partner 

(c)  On  dissolution  caused  by  the  sale  of  the  net  assets  to  a  corporation 

To  what  extent  would  the  entries  in  (c)  differ  if  the  sale  was  made  to  a  firm 
instead  of  to  a  company? 

Question  78 — State  the  rules  governing  the  distribution  of  the  assets  of  a 
partnership  when  it  is  dissolved 

(a)  Voluntarily 

(b)  Through  insolvency 

Question  79 — In  partnerships  what  is  the  rule  for  distributing 

(a)  Profits  arising  from  operations? 

(b)  Extraordinary  losses  caused  by  the  insolvency  of  the  firm  and  the 

subsequent  sale  of  its  assets  to  a  corporation? 

Question  80 — Give  the  entries  required  to  open  the  books  of  a  corporation 

Question  81 — Give  the  entries  require  to  close  the  books  of  a  corporation 

(a)  At  the  close  of  a  fiscal  period 

(b)  On  dissolution  (when  the  net  assets  are  sold  to  Einother  company) 

To  what  extent  would  the  entries  in  (b)  differ  if  the  net  assets  were  sold 
to  a  partnership  instead  of  a  corporation? 

Question  82 — What  is  the  basis  upon  which  an  expenditure  for  certain 
machinery  should  be  distributed  as  between 

(a)  Capital  Account 

(b)  Reserve  for  depreciation 

(c)  Deferred  charges  to  operation 

(d)  Repairs  and  renewals 

(e)  Surplus 

Question  83 — What  is  the  proper  basis  upon  which  the  foregoing  machinery 
should  be  valued  in  case  the  company  built  for  its  own  use? 

Question  84 — A  certain  manufacturing  concern  makes  tools  and  other  equip- 
ment for  use  in  its  own  plant  and  charges  Capital  Asset  Accounts  at  the  market 
value  (which  is  in  excess  of  cost)  and  credits  the  difference  between  market 
and  cost  values  to  the  Profit  euid  Loss  Account  of  the  period  in  which  the  tools 
and  other  equipment  were  manufactured.   Is  this  correct?  Why? 

Would  you  alter  your  opinion  if  the  credit  were  passed  to  a  Capital 
Surplus  Account? 

Would  you  alter  your  opinion  if  the  credit  were  passed  to  a  Depreciation 
Reserve  Account? 


Copyright,  1919,  The  Ronald  Press  Company 


II-15-4 

Question  85 — On  what  basis  should  the  following  inventories  be  valued: 

(a)  Raw  Materials 

(b)  Work  in  Progress 

(c)  Finished  Product 

Question  86 — 

(a)  What  is  your  understanding  of  the  following  terms,  when  applied  to 

inventory  valuations: 

1.  Market  price 

2.  Selling  price 

3.  Cost  price 

4.  Replacement  value 

(b)  How  would  you  proceed  to  ascertain  each  of  these  prices  if  you 

desired  to  apply  one  of  them  to  an  inventory? 

Question  87 — How  would  you  ascertain  unit  costs  in  the  case  of: 

(a)  Company  maiiufacturing  a  bulk  product 

(b)  Company  manufacturing  variety  of  products 

(c)  Retail  grocery  store 

Question  88 — Would  unit  costs  be  of  any  value  to  an  auditor  engaged  in 
verifying  an  inventory? 

Question  89 — 

(a)  What  do  you  understand  by  a  Current  Account? 

(b)  How  would  you  state  a  Branch  Office  Current  Account  on  the 

balance  sheet  of  the  home  office? 

(c)  Would  the  procedure  outlined  in  (b)  be  altered  in  any  way  if  the 

branch  office  were  located  in  Mexico  City? 

Question  90 — What  are  contingent  liabilities?  How  should  they  be  stated 
on  the  balance  sheet? 


Copyright,  1919,  The  Ronald  Press  Company 


II-15-5 


Solution  to  Problem  30 


JONES,  SIKES,  ROBINSON  AND  WILSON 
STATEMENT  OF  PROFIT  AND  LOSS 
YEAR  ENDING  DECEMBER  31,  1918 


EARNINGS: 

Jones  and  Robinson 
Sikes  and  Wilson 
New  Business 

DEDUCT — Preferential  Allowances: 
Jones  and  Robinson 
Sikes  and  Wilson 

Expenses 
Bad  Debts 

Interest  Allowances  on  Net  Assets 
and  Cash: 

Jones  and  Robinson 

Sikes  and  Wilson 

NET  PROFIT 


$19,000.00 
23,000.00 
7,500.00  $49,500.00 


$2,850.00 
3,450.00  $  6,300.00 


$187.50 
175.00 


16,725.00 
1,300.00 


362.50   24,687.50 


$24,812.50 


DISTRIBUTED  AS  FOLLOWS: 
Jones    (3/10) 
Sikes    (3/10) 
Robinson  (2/10) 
Wilson   (2/10) 


$7,443.75 
7,443.75 
4,962.50 
4,962.50  $24,812.50 


k 


SUMMARY  OF  CAPITAL  ACCOUNTS 

JONES      SIKES    ROBINSON    WILSON    TOGETHER 
Capital  at  Beginning    $  9,750.00  $  8,700.00  $  6,500.00  $  5,800.00  $30,750.00 
ADD— 
Preferential  Allowances 
15%  on  $19,000  (J  &  R) 
15%  on  23.000  (S  k  W) 
Interest  on  Net  Assets 
and  Cash 
5%  on  $3,750  (J  &  R) 
5%  on  3,500  (S  k   W) 
Profit 


DEDUCT — Drawings 
Capital  at  end 


1,710.00 

112.50 
7,443.75 

2,070.00 

105.00 
7,443.75 

1,140.00 

75.00 
4,962.50 

1,380.00 

70.00 
4,962.50 

2,850.00 
3,450.00 

187.50 

175.00 

24,812.50 

$19,016.25 
5,000.00 

$18,318.75 
5,500.00 

$12,677.50  $12,212.50 
3,250.00   3,500.00 

$62,225.00 
17,250.00 

$14,016.25 

$12,818.75 

$  9,427.50 

$  8,712.50 

$44,975.00 

Copyright,  1919,  The  Ronald  Press  Company 


II-15-8 

Solution  to  Problem  31 


THE  A  B  COMPANY 

COMPARATIVE  STATEMENT  OF  PROFITS  AND  INCOME 

YEARS  ENDING  DECEMBER  31,  1917,  AND  DECEMBER  31,  1918 


19  17 


19  18 


Per 


Per 


INCREASE  OR 
DECREASE(*) 
Per 


PARTICULARS 

Amount 

Cent 

Amount 

Cent 

Amount 

Cent 

Sales 

$86,000.00 

100.00 

$107,000.00 

100.00 

$21,000.00 



Cost  of  Sales 

54,346.12 

63.19 

73,800.00 

68.97 

19,453.88 

5.78 

Gross  Profit  from 

Sales 

$31,653.88 

36.81 

$  33,200.00 

31.03 

$  1,546.12 

5.78* 

DEDUCT—Selling  and 

General  Expenses: 

Salesmen's  Sal- 

aries 

$  4,100.00 

4.77 

$  5,600.00 

5.23 

$  1,500.00 

.46 

Selling  Expenses 

1,800.00 

2.09 

2,000.00 

1.87 

200.00 

.22* 

Freight -out 

324.00 

.38 

460.00 

.43 

136.00 

.05 

Officers'  Sal- 

aries 

4,000.00 

4.65 

5,000.00 

4.67 

1,000.00 

.02 

Office  Expenses 

2,236.42 

2.60 

1,550.00 

1.45 

686.42* 

1.15* 

$12,460.42 

14.49 

$14,610.00 

13.65 

$  2,149.58 

.84* 

Net  Profit  from 

Operations 

$19,193.46 

22.32 

$18,590.00 

17.38 

$   603.46* 

4.94* 

DEDUCT—Interest 

(Net) 

523.50 

.61 

546.00 

.51 

22.50 

.10* 

Surplus  Net  Profits 

$18,669.96 

21.71 

$18,044.00 

16.87 

$   625.96 

4.84* 

*Red 


Copyright,  1919,  The  Ronald.  Press  Company 


II-15-7 


ANALYSIS  OF  DECREASE  IN  NET  PROFITS 


Increase  in  Gross  Profits  due  to  increase  in  Sales  (36.81%  of  $21,000)  $7,729.41 
Decrease  in  Gross  Profits  due  to  proportionate  Increase  in  Cost  of 

Sales  (5.78%  of  $107,000)  6,183.29 


Total  Increase  in  Gross  Profits  $1,546.12 

DEDUCT — Increase  in  General  and  Selling  Expenses: 

Salesmen's  Salaries  $1,500.00 

Selling  Expenses  200.00 

Freight-out  136.00 

Officers*  Salaries  1,000.00 

Less — Decrease  in  Office  Expenses  686.42*   2,149.58 


Decrease  in  Net  Profits  from  Operation  $  603.46* 

Increase  in  Interest  Paid  $499.50 

Increase  in  Interest  Received  477.00      22.50 


Net  Decrease  in  Surplus  Net  Profits  $  625.96* 

*Red 

ANSWERS  TO  QUESTIONS 

Answer  to  Question  61 — 

(a)  The  purpose  of  a  sinking  fund  reserve  is  to  provide  for  the  retirement 
of  a  debt  out  of  earnings.   The  purpose  of  a  depreciation  reserve  is  to  provide 
out  of  earnings  for  the  loss  in  value  of  the  depreciable  property  used  by  the 
business. 

Both  of  these  reserves  are  created  by  periodical  charges  to  profit  and  loss. 
In  the  case  of  the  sinking  fund  reserve,  the  periodical  charge  is  generally 
stipulated  in  the  deed  of  trust.  In  the  case  of  the  depreciation  reserve,  the 
periodical  charge  may  sometimes  be  stipulated  by  agreement  between  the  company 
and  some  class  of  its  creditors  or  stockholders  but  is  most  often  left  to  the 
discretion  of  the  company. 

The  sinking  fund  reserve  reverts  to  the  Surplus  Account  when  the  debt  for 
which  it  was  created  is  retired.  The  depreciation  reserve,  if  properly  calcu- 
lated, will  be  extinguished  by  charges  incurred  in  the  replacement  of  the  worn- 
out  property. 

(b)  Where  the  life  of  the  debt  to  be  retired  by  a  sinking  fund  reserve  is 
co-equal  with  the  life  of  the  property  to  be  extinguished  by  a  depreciation 
reserve,  it  would  be  reasonable  (although  hardly  practicable)  to  consider  the 
accumulated  sinking  fund  reserve  as  the  equivalent  of  the  depreciation  reserve. 
When  the  debt  is  retired  the  accumulated  sinking  fund  reserve  would  be  used  to 
write  off  the  value  of  the  worn-out  property. 

The  question  of  the  manner  in  which  either  reserve  is  to  be  created  and  its 
ultimate  disposition  should  be  clearly  dissociated  from  the  question  of  the 
source  from  which  the  company  will  obtain  funds  to  retire  the  debt  or  replace 

Copyright,  1919,  The  Ronald  Press  Company 


II-15-8 

the  property.   The  creation  of  these  reserves  indicates  that  the  stockholders 
are  leaving  in  the  business  such  portion  of  the  earnings  as  are  required  to  ex- 
tinguish the  debt  or  replace  the  property.  Whether  the  resulting  assets  are 
to  be  carried  in  liquid  form  (and  thus  available  for  the  retirement  of  the  debt 
or  the  replacement  of  the  property) ,  or  whether  the  assets  are  to  be  repre- 
sented by  additions  to  the  original  property  investment,  is  a  question  of 
policy  to  be  determined  by  the  company  in  case  there  are  no  contractual 
stipulations. 

Answer  to  Question  62 — 

(1) 
Provision  for  Sinking  Fund: 

(Profit  and  Loss  account)  $130,000.00 

To—Sinking  Fund  Reserve  $130,000.00 

Provision  for  sinking  fund  for  the  five  years 
ended  December  31,  1918,  in  accordance  with 
the  terms  and  conditions  of  the  trust  deed. 

(2) 

Sinking  Fund  Assets  130,000.00 

To— Cash  130,000.00 

Cash  deposited  with  trustees  under  the 
terms  and  conditions  of  the  trust  deed. 

(3) 

Sinking  Fund  Assets  2,983.27 

To — Sinking  Fund  Reserve  2,983.27 

Increments  to  sinking  funds  in  nature  of 
interest  on  funds  in  the  hands  of  the 
trustees. 

(4) 

Bonds  Redeemed  100,000.00 

To— Sinking  Fund  Assets  100,000.00 

To  record  bonds  redeemed  by  the  trustees. 

Answer  to  Question  63— 

(1) 

Cash  $450,000.00 

Discount  on  Bonds  50,000.00 

To— First  Mortgage  6%  Bonds  $500,000.00 

Proceeds  from  sale  of  $500,000  bonds  at  90. 

(2) 

New  Plant  450,000.00 

To— Audited  Vouchers  450,000.00 

(3) 

Audited  Vouchers  450,000.00 

To— Cash  450,000.00 

Copyright,  1919,  The  Ronald  Press  Company 


II-15-9 

The  discount  on  bonds  should  be  amortized  over  the  life  of  the  bonds.  That 
portion  of  the  discount  relating  to  the  period  of  construction  may  be  charged 
to  the  cost  of  the  new  plant.  It  would  be  improper  to  charge  the  entire 
discount  to  the  new  construction. 

Answer  to  Question  64 — Depreciation  is  an  expense  of  conducting  the  busi- 
ness, and  if  properly  calculated  is  just  as  certain  a  loss  as  wages,  rent,  or 
other  expenses  paid.  The  fact  that  the  actual  disbursements  on  account  of  depre- 
ciation are  deferred  does  not  alter  the  situation,  A  loss  has  occurred  and 
that  loss  was  caused  by  the  operations  of  the  business.   Consequently  pro- 
vision must  be  made  therefor  before  net  earnings  can  be  arrived  at.  To  reduce 
the  depreciation  charge  so  as  to  increase  the  book  net  earnings  and  pay 
dividends  therefrom,  is  in  effect  a  payment  of  dividends  out  of  capital.   If 
such  payments  should  cause  the  insolvency  of  the  company,  each  of  the  directors 
authorizing  such  payment  would  be  personally  liable  to  the  creditors  for  the 
amount  so  disbursed. 

Where  a  liberal  policy  had  prevailed  in  the  past  and  the  annual  deprecia- 
tion charge  was  larger  than  the  amount  actually  required  under  the  circum- 
stances, the  directors  would  be  justified  in  reducing  the  provision  for  the 
current  year  provided  that  such  reduction  did  not  reduce  the  provision  below  a 
reasonable  amount. 

If  the  accumulated  depreciation  reserve  was  materially  in  excess  of  the 
requirements  it  may  be  allowable  for  the  directors  to  authorize  an  adjustment 
between  the  depreciation  reserve  and  the  surplus.  But  any  adjustment  of  this 
character  should  not  reduce  below  a  reasonable  amount  the  depreciation  pro- 
vision charged  to  the  Profit  and  Loss  Account  of  the  current  period. 

Answer  to  Question  65 — The  indorsement  created  a  contingent  liability  in 
that  if  the  maker  of  the  notes  should  fail  to  pay  same,  recourse  can  be  had 
on  the  B  C  Company.  Inasmuch  as  these  notes  are  unpaid  at  the  date  the  balance 
sheet  is  prepared  the  contingent  liability  must  be  expressed  thereon,  preferably 
as  a  footnote  to  the  balance  sheet. 


Copyright,  1919,  The  Ronald  Press  Company 


II-16-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  16 
A  SURVEY  OF  AUDITING 


Problem  35 

The  following  balance  sheet  of  the  M  Co.  shows  the  financial  position  of 
that  company  at  December  31,  1917: 


ASSETS 
CAPITAL  ASSETS: 

Real  Estate  and  Buildings 
Machinery,  Tools,  and  Fixtures 
Horses  and  Wagons 

Total  Capital  Assets 
CURRENT  ASSETS: 
Inventories 
Customers*  Accounts 
Notes  Receivable 
Cash  on  Hand  and  in  Bank 

Total  Current  Assets 
DEFERRED  CHARGES  TO  INCOME: 
Prepaid  Insurance  Premiums 
Prepaid  Interest 

Total  Assets  and  Deferred  Charges 


$60,000.00 
85,000.00 
20,000.00 


$65,000.00 

40,000.00 

15,000.00 

5,000.00 


$  1,000.00 
500.00 


$165,000.00 


125,000.00 

1,500.00 
$291,500.00 


LIABILITIES 
CAPITAL  LIABILITIES: 

Capital  Stock  Issued  and  Outstanding 
First  Mortgage  6%  Bonds 

Total  Capital  Liabilities 
CURRENT  LIABILITIES: 
Bank  Loans 
Trade  Creditors 
Sundry  Accounts 


Total  Current  Liabilities 


SURPLUS 


$150,000.00 
50,000.00 


45,000.00 

15,000.00 

2,000.00 


$200,000.00 


62,000.00 
29,500.00 

$291,500.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-16-2 

A  year  later,  or  on  December  31,  1918,  the  following  balance  sheet  was 
prepared  from  the  books: 

ASSETS 
CAPITAL  ASSETS: 

Real  Estate  and  Buildings  $  65,000.00 

Machinery,  Tools,  and  Fixtures  90,000.00 

Horses  and  Wagons  25,000.00 


Prepaid  Interest 


Total  Capital  Assets  $180,000.00 
CURRENT  ASSETS: 

Inventories  |129,000.00 

Customers'  Accounts  45,000.00 

Notes  Receivable  9,000.00 

Cash  on  Hand  and  in  Bank  9,000.00 


Total  Current  Assets  192,000.00 

DEFERRED  CHARGES  TO  INCOME:  $  1,200.00 

Prepaid  Insurance  Premiums  200.00     1,400.00 


Total  Assets  and  Deferred  Charges  $373,400.00 


LIABILITIES 
CAPITAL  LIABILITIES: 

Capital  Stock  Issued  and  Outstanding  $150,000.00 

First  Mortgage  6%  Bonds  50,000.00 


Total  Capital  Liabilities  $200,000.00 

CURRENT  LIABILITIES: 

Bank  Loans  $  60,000.00 

Trade  Creditors  25,000.00 

Sundry  Accounts  4,000.00 


Total  Current  Liabilities  89,000.00 

SURPLUS  ACCOUNT: 

Balance  at  January  1,  1918  $  29,500.00 

ADD — Profits  for  the  year  94,900.00 


$124,400.00 
DEDUCT — Dividends  declared  and  paid  40,000.00    84,400.00 


Total  Capital  Stock,  Liabilities, , and  Surplus  $373,400.00 


Prepare  statement  showing  what  disposition  has  been  made  of  the  profits 
earned  for  the  year  ended  December  31,  1918. 


Copyright,  1919,  The  Ronald  Press  Company 


II-16-3 

Problem  36 

A  firm  of  three  partners  with  equal  capital  and  interest  opeiate  for  three 
years,  when  the  junior  partner  withdraws. 

The  partnership  agreement  provides  that  a  retiring  partner  shall,  in  addi- 
tion to  his  capital  and  share  of  profits,  receive  by  way  of  good-will  two 
years*  purchase  of  his  share  of  the  average  profits  shown  for  the  three  years 
next  preceding  the  date  of  withdrawal. 

Make  out  a  balance  sheet,  statement  of  profits  and  income,  and  an  account 
with  the  retiring  partner  as  of  June  30,  1919,  from  the  following  memorcindum 
handed  to  you  with  your  instructions,  on  September  3,  1919,  allowing  for 
depreciation  on  Plant  account,  5%;  on  Leasehold  account,  15%;  and  for  discount 
and  possible  loss  on  Accounts  Receivable  •  10%.   The  profits  for  two  previous 
years  were  respectively  $44,540  and  $55,050. 

Capital  %   60,000.00 

Plant,  Tools,  and  Equipment  37,000.00 

Leasehold  11,250.00 

Merchandise  Inventory,  July  1,  1918  (net  after 

deducting  Reserve  of  $13,470)                     12,000.00 

Merchandise  Inventory,  June  30,  1919         *       19,000.00 

Accounts  Receivable  48,500.00 

Accounts  Payable  46,975.00 

Merchandise  Sales  137,970.00 

Merchandise  Purchases  69,510.00 

Wages  11,500.00 

General  Expense  3,900.00 

Bank  10,035.00 

A's  Drawing  Account  13,750.00 

B's    ■       •  13,750.00 

C»8    •       •  13,750.00 

The  inventory  reserve  is  no  longer  required  and  can  be  written  backt 


QUESTIONS  ON  AUDITING 

Question  91 — What  is  an  audit? 

Question  92— State  briefly  the  objects  and  advantages  of  an  audit. 

Question  93 — Is  it  the  duty  of  the  auditor  of  a  company  to  balance  the 
books?  Assuming  you  were  requested  to  discover  an  error  in  the  trial  balance 
of  a  set  of  books,  which  the  staff  of  a  company  had  failed  to  detect,  what 
steps  would  you  take? 

Question  94 — What  is  the  distinction  between  audit  and  accountancy  work? 
If  instructed  by  a  private  firm  to  perform  the  latter,  how  would  vou  limit 
your  responsibility? 

Question  95 — What  are  the  legal  responsibilities  of  an  auditor? 

Copyright,  1919,  The  Ronald  Press  Company 


II-16-4 

Solution  to  Problem  32 

JOURNAL  ENTRIES  ON  HOME  OFFICE  BOOKS 

(1) 
London  Branch  Office  $480,000.00 

To— Cash  $480,000.00 

Cash  investment  remitted  to  branch 
office  @   4.80. 

(2) 
Consignment-Outward  #1  240,000.00 

To — Merchandise  Purchases  240,000.00 

Merchandise  shipped  on  consignment  to 
London  branch. 

(3) 
Cash  120,000.00 

To— London  Branch  120,000.00 

Draft  drawn  against  consignment  #1  @   4.80. 

(4) 
London  Branch  Office  47,500.00 

To — Merchandise  Purchases  47,500.00 

Merchandise  shipped  to  branch  office. 

(5) 
Cash  47,500.00 

To — London  Branch  Office  47,500.00 

Draft  @  4.75  drawn  against  shipment  in  (4). 

(6) 

London  Branch  Office  47,600.00 

To — Merchandise  Purchases  47,600.00 

Merchandise  shipped  to  branch  office. 

(7) 
Cash  47,600.00 

To — London  Branch  Office  47,600.00 

Draft  @   4.76  on  shipment  in  (6). 

(8) 
London  Branch  137,750.00 

To— Sales  137,750.00 

Net  sale  of  one-half  of  consignment  #1. 

(9) 
Cash  137,750.00 

To — London  Branch  137,750.00 

Receipt  of  net  proceeds  from  branch 
office  on  consignment  #1. 

Copyright,  1919,  The  Ronald  Press  Company 


II-16-5 


(10) 
Cash  $380,000.00 

To — London  Branch  Office  $380,000.00 

Remittance  of  portion  of  capital  investment. 

(11) 
Office  Equipment,  Branch  Offices  24,000.00 

To — London  Branch  Office  24,000.00 

Being  the  permanent  expenditure  trans- 
ferred to  Investment  account. 

JOURNAL  ENTRIES  ON  BRANCH  OFFICE  BOOKS 

(1) 
Cash  £100,000.0.0 

To — Home  Office  £100,000.0.0 

Cash  investment  received  from  home 
office, 

(2) 

Office  Equipment  5,000.0.0 

To — Cash  5,000.0.0 

Office  equipment  purchased  in  London. 

(3) 

Home  Office  25,000.0.0 

To— Cash  25,000.0.0 

Draft  on  consignment  #1  paid. 

(4) 

Purchases  40,000.0.0 

To — Creditors'  Accounts  40,000.0.0 

Merchandise  purchased  on  account. 

(5) 

Customers'  Accounts  25,000.0.0 

To — Sales  25,000.0.0 

Sale  of  one-half  of  purchase  in  (4) 
on  account. 

(6) 

Petty  Cash  Fund  1,000.0.0 

To — Cash  1,000.0.0 

Petty  cash  fund  established. 

(7) 

Merchandise  Purchases  10,000.0.0 

To — Home  Office  10,000.0.0 

Merchandise  purchased  from  home  office. 

18) 
Home  Office  10,000.0.0 

To — Cash  10,000.0.0 

Draft  @  4.75  on  purchase  from  home  office. 

Copyright,  1919,  Th*  Ronald  Press  Company 


II-16-6 


(9) 

Merchandise  Purchases  £10,000.0.0 

To— Home  Office  £10,000.0.0 

Merchandise  purchased  from  home  office. 

(10) 
Home  Office  10,000.0.0 

To— Cash  10,000.0.0 

Draft  @  4.76  on  purchase  from  home 
office  in  (9). 

(11) 
Cash  30,000.0.0 

To — Consignment  Sales  30,000.0.0 

Sale  of  one-half  of  consignment  #1. 

(12) 
Expenses  on  Consignments  100.0.0 

To — Cash  100.0.0 

Expenses  incurred  on  consignments. 

(13) 

Consignment  Sales  1,000.0.0 

To — Expenses  on  Consignments  100.0.0 

Commission  900.0.0 

To  close  out  Consignment  Sales  account. 

(14) 
Consignment  Sales  29,000.0.0 

To — Home  Office  29,000.0.0 

To  close  out  Consignment  Sales. 

(15) 
Home  Office  29,000.0.0 

To — Cash  29,000.0.0 

Remittance  of  net  proceeds  to  home 
office. 

(16) 
Home  Office  80,000.0.0 

To — Cash  80,000.0.0 

Remittance  to  home  office  of  portion 
of  investment. 

(17) 
Home  Office  5,000.0.0 

To— Office  Equipment  5,000.0.0 

Transfer  of  Office  Equipment  account 
to  home  office. 


Copyright,  1919,  The  Ronald  Press  Company 


BRANCH  OFFICE  ACCOUNT  ON  HOME  OFFICE  BOOKS 


H-16-7 


Investment 
Merchandise 
Merchandise 
Sales-Con- 
signment 
Balance 


$480,000.00  £100,000.0.0  Draft 


47,500.00 
47,600.00 

137,750.00 
47,500.00 


10,000.0.0 
10,000.0.0 

29,000.0.0 
10,000.0.0 


Draft 
Draft 
Draft 
Draft 

Office  Equip- 
ment acct. 
Foreign  Exch. 


$120,000.00  £25,000.0.0 

47,500.00  10,000.0.0 

47,600.00  10,000.0.0 

137,750.00  29,000.0.0 

380,000.00  80,000.0.0 


24,000.00 
3,500.00* 


5,000.0.0 


$760,350.00  £159,000.0.0 


$760,350.00  £159,000.0.0 


♦Carried  to  Profit  and  Loss,  or  Reserve  for  Foreign  Exchange. 


HOME  OFFICE  ACCOUNT  ON  BRANCH  OFFICE  BOOKS 


Draft— Consignment  #1 

Draft — Purchase 

Draft — Purchase 

Draft — Consignment  Sales 

Draft — Investment 

Office  Equipment 


£  25,000.0.0 
10,000.0.0 
10,000.0.0 
29,000.0.0 
80,000.0.0 
5,000.0.0 

£159,000.0.0 


Investment 
Purchases 
Purchases 
Consignment  Sales 
Balance 


£100,000.0.0 
10,000.0.0 
10,000.0.0 
29,000.0.0 
10,000.0.0 


£159,000.0.0 


Copyright,  1919,  The  Ronald  Press  Company 


II-16-8 

Solution  to  Problem  55 

STATEMENT  SHOWING  RECONCILIATION  OF  THE 
HOME  OFFICE  AND  BRANCH  OFFICE  CURRENT  ACCOUNTS 

BALANCE — per  home  office  books  $19,618.30 

BALANCE — per  branch  office  books  18,808.05 


DIFFERENCE — being  net  debits  of  the  home  office  not  credited  by  the 

branch  office  as  summarized  below  $   810.25 


1.  Items  debited  by  the  home  office  not  credited 
by  the  branch  office 

(a)  Raw  materials  shipped  but  not  yet 

received  $2,103.41* 

(b)  Cash  advance  5,000.00 

(c)  Advances  to  the  branch  manager       450.00  %   7,555.41 


2.  Items  debited  by  the  bramch  office  not  credited  by 
the  home  office 

(a)  Payment  to  the  American  Steel  Wks.   $4,000.00 

(b)  Telegraph  and  other  charges  304.77  4,504.77 


5.  Items  credited  by  the  branch  office  not  debited  by  the 
home  office 
(a)  Balance  of  the  Profit  and  Loss  account  for  year  $11,047.95 
Balance — Net  debits  of  the  home  office  not  credited 

by  the  branch  office  (as  above)  810.25 


$11,858.18  $11,858.18 


In  order  to  bring  the  two  accounts  into  agreement  it  will  be  necessary 
to  make  the  following  entries: 

ON  THE  HOME  OFFICE  BOOKS 

(1) 
Accounts  Payable  Controlling  Account  $  4,000.00 

(American  Steel  Works) 
Telegraph  and  other  charges  304.77 

To — Branch  Office  Account  $  4,504.77 

Charges  of  the  branch  office  not  taken  up 
by  the  home  office  (as  per  details)  con- 
tained in  the  last  current  account  re- 
ceived from  the  branch, 

(2) 

Branch  Office  Account  11, 047, 93 

To — Branch  Office — Profit  and  Loss  11,047.95 

To  take  up  the  profits  of  the  branch  office 
'  for  the  year  as  shown  by  their  current 
account  and  the  detailed  statement  of 
•  Profit  a»d  Loss  account  attached  thereto. 

Copyright,  1919,  The  Ronald  Press  Company 


II-16-9 


ON  THE  BRANCH  OFFICE  BOOKS 

Raw  Materials  Account  $2,103.41 

Cash  5,000.00 

Advance  to  the  Branch  Manager  450.00 

To — Home  Office  Account 
Charges  of  the  home  office  not  taken  up  by 
the  branch  office. 

Another  form  commonly  used  is  as  follows: 

STATEMENT  SHOWING  RECONCILIATION  OF  THE 
HOME  OFFICE  AND  BRANCH  OFFICE  CURRENT  ACCOUNTS 


|7»553.41 


1,  Home  Office  charges  branch 
office  does  not  credit: 

(a)  Merchandise 

shipped  by  home 

office  but  not 

yet  received  by 

branch         $  2,103.41 

(b)  Cash  advanced  by 

home  office  not 

credited  by 

branch  5,000.00 

(c)  Advances  to  branch 

manager  on  ac- 
count of  travel- 
ing expenses  not 
credited  by 
branch  office       450.00 


1.  Home  office  credits 

branch  office  does  not 
charge  (• 


Total 


%■ 


Total 


$  7,553.41 


2.  Branch  office  charges  home 
office  does  not  credit: 

(a)  Payment  to  the 
American  Steel 
Works  on  account 
of  steel  pur- 
chased by  home 
office         i   4,000.00 

(b)  Telegraph  and  other 
charges  during 
period  charge- 
able to  home 


2«  Branch  office  credits 
home  office  does  not 
charge : 
(a)  Balance  of  branch 
Profit  and  Loss 
account  for  year  $11,047.93 


3.  Balance  (as  above) 


810.25 


office 


304.77 


Total 


$  4,304.77 
$11,858.18 


$11,858.18 


Copyright,  1919,  The  Ronald  Press  Company 


11-16-10 


ANSWERS  TO  QUESTIONS 


Answer  to  Question  66 — One  plan  of  reconciling  ordinary  branch  office 
accounts  with  the  home  office  accounts  is  to  reverse  the  balance  of  the  branch 
office  accounts  with  the  home  office  accounts.   (This  is  on  the  books  of  the 
home  office. ) 

Then  take  the  home  office  account  on  the  branch  office  books  and  show 
the  balance  of  that  account  reversed.  Add  to  this  the  items  opened  in  the 
branch  office  account  on  the  books  of  the  home  office  not  taken  up  by  the  branch 
office.  Then  add  the  open  items  on  the  head  office  books  with  the  head  office 
account  on  the  branch  office.   The  columns  should  balance. 

Since  in  case  of  reconciling  home  office  books  with  foreign  office  books, 
foreign  money  is  shown  in  the  branch  account,  the  reconciliation  is  made  in 
foreign  currency. 


Answer  to  Question  67 — 


LONDON  TRIAL  BALANCE 


ACCOUNTS 
New  York  Office 

Remittances 

Cash 

Customers'  accounts 

Inventory 

Furniture  and  Fixtures 

Creditors'  accounts 

Sales 

Purchases 

Expenses 


RATE  OF  CONVERSION 
Rate  at  beginning  of  period  repre- 
sented in  balance  of  this  account 
Actual  cost  of  remittances 
Current  rate 
Current  rate 

Current  rate  at  end  of  last  period 
Rate  at  time  of  purchase 
.Current  rate 
Average  rate 
Average  rate 
Average  rate 


Inventory  at  end  of  period  should  be  converted  at  the  current  rate. 


Answer  to  Question  68— 


(a) 


(1) 
Depository  (under  the  exchange  plan) 
To — First  Mortgage  6%  Bonds 
To  record  the  par  value  of  the  first 
mortgage  6%  bonds  deposited  with 
• to  be  delivered  to  pre- 
ferred stockholders  in  exchange  for 
preferred  shares,  per  resolutions 
adopted  by  the  stockholders  at  a 
meet ing  held  on 


$1,000,000.00 


$1,000,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


11-16-11 


(2) 
Preferred  Stock  $1,000,000.00 

To — Depository  (under  the  exchange 
plan) 
To  record  the  preferred  stock  received 
from  the  depository — the  same  having 
been  turned  in  by  the  preferred  stock- 
holders in  exchange  for  $1,000,000  of 
first  mortgage  6%  bonds  of  an  equiva- 
lent value — per  resolutions  adopted 
by  the  stockholders  at  a  meeting  held 
on 


(b) 
Premium  on  Preferred  Stock  (later  trans- 
ferred to  Surplus  Account) 
Preferred  Stock 
To — Cash 
Cash  paid  in  retirement  of  preferred 
stock,  $100,000  (par  value). 


%   1,000,000.00 


5,000.00 
100.000.00 


105,000.00 


Answer  to  Question  69 — 


(a) 


Cash  (402,500.00 

To — Preferred  Stock  $350,000.00 

Premium  on  Preferred  Stock  52,500.00 

To  record  sale  of  $350,000  preferred 
stock  at  115.  Under  terms  of  issue  no 
part  of  the  premium  is  available  for 
dividends. 

(b) 

JULY  1,  1919 
First  Mortgage  6%  Bonds  $300,000.00 

Premium  on  Retirement  of  First  Mortgage 

6%  Bonds  7,500.00 

To — Cash  $307,500.00 

To  record  retirement  of  $300,000  first 
mortgage  6%  bonds  due  July  1,  1920, 
at  10254,  in  accordance  with  terms  of 
trust  deed. 


The  premium  on  preferred  stock  referred  to  in  (a)  would  be  carried  as  a 
separate  item  on  the  balance  sheet  immediately  below  the  capital  stock.   The 
premium  paid  on  retirement  of  the  first  mortgage  6%  bonds  would  be  charged 
off  during  the  year.   On  the  statement  of  profits  and  income  it  would  be  shown 
as  an  extraordinary  expenditure  and  deducted  after  net  profits  from  operation 
had  been  ascertained. 


Copyright,  1919,  The  Ronald  Press  Company 


11-16-12 

The  cost  of  the  purchase  of  $50,000  (par  value)  of  the  preferred  stock  of 
the  R  Manufacturing  Co,  for  $60,000  would  be  charged  to  an  appropriate  account 
to  record  the  investment. 

Answer  to  Question  70 — 

(a)  If  these  bonds  represent  the  company's  own  bonds  held  in  the  treasury. 
It  will  be  necessary  to  qualify  the  assets  as  follows; 

Treasury  Bonds  $200,000.00 

(Deposited  as  collateral  to  secure  bank  loans  of 
$50,000) 

Similarly,  the  liability  of  Notes  Payable  would  be  qualified,  viz.: 

Bank  Loans  $150,000.00 

(Secured  by  $200,000  of  first  mortgage  6%  bonds 
deposited  as  collateral) 

(b)  The  fact  that  $125,000  of  the  total  accounts  receivable  of  $198,093.11 
is  in  dispute  is  an  essential  one  to  be  brought  out  on  the  face  of  the  balance 
sheet.  It  may  or  may  not  be  a  recoverable  asset,  but  the  fact  that  it  is  in 
dispute  suggests  that  some  loss  will  be  sustained  in  the  realization  of  the 
accounts.  An  auditor,  if  he  errs  at  all,  had  better  do  so  on  the  conservative 
side.  The  exact  procedure  would  depend  on  the  peculiar  circumstances  surround- 
ing the  case.  A  Reserve  for  Bad  Debts  should  be  set  up  for  any  amount  adequate 
to  cover  any  probable  loss;  or  the  words  "See  footnote*  should  be  placed  after 
the  caption  of  Accounts  Receivable.  In  the  footnote  there  would  be  given  an 
adequate  explanation  of  the  disputed  ace  counts. 

REFERENCES : 

Montgomery,  pages  1-58 
Wildman,  pages  1-20 


Copyright,  1919,  The  Ronald  Press  Company 


11-16-13 


Copyright,  1919,  The  Ronald  Press  Company 


11-16-14 


Copyright,  1919,  The  Ronald  Press  Company 


II-17-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  17 
CASH  AND  CASH  FUNDS 


Problem  37 


The  trial  balance  of  A  B  Co.  on  January  1,  1919,  appears  as  follows: 


Cash  'i       50,100.00 

Accounts  Receivable,  Gross   400,000.00 
Notes  Receivable  30,000.00 

Merchandise  Inventory, 

January  1,  1918,  Gross     240,000.00 
Merchandise  Purchases, 

to  January  1,  1919      1,250,000.00 
Prepaid  Interest,  Janu- 
ary 1,  1918  12,500.00 
Interest,  Paid  to  July 

1,  1919  36,000.00 

Expenses,  Paid  to  Janu- 
ary 1,  1919  156,000.00 
Reserve  for  Disc.  Accts. 

Payable  January  1,  1918     4,000.00 
Bad  Debts,  Charged  Off  to 

January  1,  1919  2,500.00 

Returned  Sales  Customers    100,000.00 
Salaries  20,000.00 

Taxes  5,000.00 

Plant  250,000.00 

Discounts  Allowed  Cus- 
tomers 51,900.00 


Reserve  for  Disc.  Accts. 
Receivable,  January  1, 
1918  $       12,000.00 

Reserve  for  Disc.  Mdse. 
Inventory,  January  1, 
1918  12,000.00 

Accounts  Payable  90,000.00 

Notes  Payable  600,000.00 

Sales  1,500,000.00 

Purchase  Discounts  Col- 
lected on  Settlements 
with  Creditors  59,500.00 

Reserve  for  Bad  Debts, 

January  1,  1918  3,000.00 

Mdse.  Returned  to  Credi- 
tors, to  January  1,  1919    50,000.00 

Collected  on  Accts. 
charged  to  Profit  and 
Loss  in  1917  500.00 

Credit  Insurance,  Received 

on  1917  Losses  1,000.00 

Profit  and  Loss,  Jsmuary 

1,  1918  55,000.00 

Capital  Stock  225,000.00 


$2,608,000.00 


$2,608,000.00 


The  following  information  is  stated: 

Accounts  Payable,  January  1,  1918,  gross  $80,000. 
Accounts  Receivable,  January  1,  1918,  gross  $300,000. 
Notes  Payable,  January  1,  1918,  $500,000.   Interest  paid  at 

5%  to  July  1,  1918. 
On  July  1,  1918,  $500,000  is  renewed  at  6%  for  1  year  a^d  $100,000 

additional  borrowed  at  same  rate  for  one  year. 
Inventory  January  1,  1919,  $320,000  gross. 


Copyright,  1919,  The  Ronald  Press  Company 


II-17-2 

Goods  bought  on  terms  of  5%  30  days. 
Goods  sold  on  terms  of  4%  30  days. 

Reserve  for  bad  debts,  January  1,  1919,  to  be  1%  on  gross  Ac- 
counts Receivable. 

Submit  statement  of  profits  and  income  and  balance  sheet. 

Problem  38 

You  are  called  upon  to  make  up  a  statement  of  the  condition  of  a  business 
vhich  has  been  running  for  a  few  years  at  a  loss,  but  to  which  has  been  added 
a  new  feature,  upon  the  possibilities  of  which  and  his  own  financial  respon- 
sibility outside  of  the  business,  the  proprietor  has  succeeded  in  negotiating 
a  loan.  The  books  have  not  been  well  kept,  but  the  following  particulars  can 
be  obtained  from  them: 

Merchandise  purchased  during  the  year  $50,000.00 

Total  sales  for  year  40,000.00 

Borrowed  from  John  Smith  30,000.00 

Fixtures  purchased  during  the  year  5,000.00 

Expenses  for  year  20,000.00 

Proprietor's  drawings  during  the  year  3,000.00 

Cash  on  hand,  December  31,  1917  1,300.00 

Accounts  receivable,  December  31,  1917  5,000.00 

Accounts  payable,  December  31,  1917  15,000.00 
Merchandise  inventory  new  department,  December  31, 

1917  25,000.00 

The  books  on  January  1,  1917,  showed  the  following  balances: 

Cash  on  hand  $  300.00 

Accounts  receivable  2,000.00 

Fixtures  2,00C.00 

Accounts  payable  3,000.00 

Capital  5,000.00 

Advances  to  employees  2,000.00 

On  January  1,  1917,  the  bookkeeper  had  made  up  the  following  statement 
intended  for  a  balance  sheet  at  that  date: 

Cash  $  300.00  Accounts  Payable           $3, 000.00 

Accounts  Receivable  4,000.00  Loan  from  Mary  White         6,000.00 

Fixtures  2,000.00 

Deficit  2,700.00 


$9,000.00  $9,000.00 


Without  calculating  interest  or  depreciation  make  up  a  profit  and  loss 
account  for  1917  and  a  balance  sheet  as  of  December  31,  1917. 


Copyright,  1919,  The  Ronald  Press  Company 


II-17-3 


QUESTIONS  ON  AUDITING 


Question  96 — 

(a)  Differentiate  between  a  "balance  sheet"  audit  and  "detail"  audit. 

(b)  What  do  you  understand  by  a  "cash"  audit? 

Question  97 — Outline  an  adequate  system  of  internal  check  and  state  whether 
the  system  outlined  is  intended  to  apply  to  a  particular  enterprise. 

Question  98 — In  an  audit  of  the  cash  transactions  would  you  regard  it 
essential  to  verify  the  footings  of  the  cash  book  and  trace  the  postings  there- 
from to  the  ledger?  State  your  reasons. 

Question  99 — State  briefly  how  you  would  verify  the  following  apparent 
reconcilement  of  cash  at  the  close  of  an  audit: 


Cash  on  hand  as  per  cash  book 
Balance  as  per  bank  pass  book 
Add  check  of  A  B,  not  deposited 


Deduct  checks  drawn,  but  not  paid  by  bank 


$5,610.00 
400.00 

$6,010.00 
2,500.00 


$3,810.00 


Cash  in  drawer 


$3,510.00 

300.00  $3,810.00 


Question  100 — If  the  cash  in  bank  as  shown  by  the  cash  book  or  ledger 
is  reconciled  with  the  amount  shown  by  the  pass  book  or  certificate  obtained 
from  the  bank,  is  it  necessary  to  check  the  pass  book  with  the  deposits  as 
shown  by  the  cash  book?  Give  reasons  for  your  answer,  stating  the  nature  of 
a  possible  irregularity  that  might  be  disclosed  by  such  detail  checking. 


Copyright,  1919,  The  Ronald  Press  Company 


II-17-4 

Solution  to  Problem  34 


UNITED  STATES  CEMENT  COMPANY 
BALANCE  SHEET,  JUNE  30,  1918 


ASSETS 


CAPITAL  ASSETS: 
Real  Estate 
Buildings 
Machinery- 
Tools  and  Equipment^ 


CURRENT  ASSETS : 

Inventory  of  Cement  and  Supplies 
Customers'  Accounts 
Bills  Receivable 


Less — Reserve  for  Bad  Debts 
Cash  on  Hand  and  in  Bank 


Cost 

$  66,000.00 

180,000.00 

285,000.00 

10,000.00 


Depreciation 
Reserve 


Exhibit  I 


Book 


Value 


^ $  66,000.00 

4,500.00  175,500.00 

21,375.00  263,625.00 

1,000.00  9,000.00 


$541,000.00  $26,875.00  $514,125.00 


$79,350.00 
11,350.00 

$90,700.00 
1,848.75 


LIABILITIES 


CAPITAL  STOCK: 

Issued  and  Outstanding 
FIRST  MORTGAGE  6%  BONDS 
CURRENT  LIABILITIES: 

Bills  Payable 

Accounts  Payable 

ACCRUED  LIABILITIES  NOT  DUE: 
Taxes 
Wages 

Interest  on  Bills  Payable 
Bond  Interest 


DEFICIENCY  ACCOUNT: 

Net  Loss  for  year  ending  June  30,  1918 


$28,506.00 


88,851.25 

12,850.00   130,207.25 


$63,000.00 
48,000.00 


750.00 
1,875.00 

875.00 
6,000.00 


$644,332.25 


$450,000.00 
100,000.00 


111,000.00 


9,500.00 
$670,500.00 
*  26,167.75 
$644,332.25 


«  Red* 


Copyright,  1919,  The  Ronald  Press  Company 


II-17-5 
Exhibit  II 


UNITED  STATES  CEMENT  COMPANY 
STATEMENT  OF  PROFITS  AND  INCOME 
FISCAL  YEAR  ENDING  JUNE  30,  1918 

(Number  of  barrels  sold,  220,000) 

Gross  Sales 

DEDUCT — Discounts  Allowed 

Net  Proceeds  from  Sales 

DEDUCT — Cost  of  Cement  Sold  (Exhibit  III) 

Loss  from  Mill  Operations 
DEDUCT— MISCELLANEOUS  INCOME: 

Interest  on  Bills  Receivable,  Bank  Balances,  etc. 


ADD—GENERAL  AND  ADMINISTRATIVE  EXPENSES: 
Office  Salaries  and  Expenses 
Bad  and  Doubtful  Accounts 

TOTAL  LOSS  FROM  OPERATION 

ADD— INTEREST  ON  BORROWED  MONEY: 

On  Bonds 

On  Bills  Payable 

TOTAL  LOSS  CARRIED  TO  DEFICIENCY  ACCOUNT 


AMOUNT     PER  BBL. 

$184,875.00   $0.8404 

1,400.00     .0064 


$183,475.00 
193,644.00 


•  8340 
.8802 


$ 

10,169.00 

.0462 

ices,  etc. 

900.00 

.0041 

$ 

9,269.00 

.0421 

$5,175.00 

1,848.75 

7,023.75 

•  0319 

$ 

16,292.75 

.0740 

$6,000.00 

3,875.00 

9,875.00 

.0450 

$  26,167.75   $0.1190 


Exhibit  III 


UNITED  STATES  CEMENT  COMPANY 

STATEMENT  OF  COST  OF  CEMENT  PRODUCED 

YEAR  ENDING  JUNE  30,  1918 

PARTICULARS  AMOUNT 
Raw  Material  Used  $150,000.00 
Mill  Labor  29,475.00 
Heat  and  Power  4,200.00 
Taxes  750.00 
Factory  Expenses  2,550.00 
Sundry  Materials  and  Supplies  7,400.00 
Depreciation  on  Buildings,  Machinery,  Tools,  and  Equip- 
ment 26,875.00 


PER  BBL. 


DEDUCT—Discounts  Received 
Cost  of  Cement  Produced 


$221,250.00   $0.8850 
1,200.00     .0048 


$220,050.00   $0.8802 


Copyright,  1919,  The  Ronald  Press  Company 


II-17-6 


CEMENI  SIOCK  ACCOUNT 


PARTICULARS 

Inventory 

Cost  of  Cement  Produced 


Cost  of  Cement  Sold  (Exhibit  II) 
Inventory,  June  30,  1918 


OF  BBLS. 
250,000 

PER  BBL, 

$ 

.8802 

AMOUNT 
$ 

220,050.00 

250,000 

$  .8802 

$220,050.00 

220,000 
30,000 

$  .8802 
.8802 

$193,644.00 
26,406.00 

250,000 

$0.8802 

$220,050.00 

ADJUSTING  JOURNAL  ENTRIES 


(1) 


Depreciation  on  Buildings 
Depreciation  on  Machinery 
Depreciation  on  Tools  and  Equipment 
To~Reserve  for  Depreciation 
To  provide  depreciation  for  the  fiscal  year 
ending  June  30,  1918,  as  set  out  in  the 
following  summary: 


$  4,500.00 

21,375.00 

1,000.00 


$26,875,00 


ANNUAL 

AMOUNT  OF 

ASSET 

BOOK  VALUE 

RATE 

DEPRECIATION 

Buildings 

$180,000.00 

2\% 

$  4,500.00 

Machinery 

285,000.00 

VA% 

21,375.00 

Tools  and  Equipment 

10,000.00 

10  % 

1,000.00 

$475,000.00 


$26,875.00 


(2) 

Mill  Labor  $1,875.00 

To — Accrued  Wages  $1,875.00 

To  take  up  the  accrued  wages  at  June  30«  1918, 

(3) 

Taxes  750.00 

To—Accrued  Taxes  750.00 

To  take  up  the  accrued  taxes  to  June  30,  1918. 

(4) 
Interest  on  Bills  Payable  875,00 

To — Accrued  Interest  on  Bills  Payable  875,00 

To  take  up  the  accrued  interest  on  Bills 
Payable  at  June  30,  1918. 


Copyright,  1919,  The  Ronald  Press  Company 


H-17-7 


(5> 

Bad  and  Doubtful  Accounts  5l»848.75 

To — Reserve  for  Bad  and  Doubtful  Accounts  $1,848.75 

1%  on  sales  for  year, 

(6) 
Sundry  Materials  and  Supplies  Used  7»400«00 

To — Storekeeper  7,400.00 

Materials  and  supplies  used  during  the  year 
ended  June  30,  1918,  as  per  storekeeper's 
distribution  reports, 

(7) 

Bond  Interest  6,000.00 

To — Accrued  Interest  on  First  Mortgage 

6%  Bonds  6,000*00 

To  take  up  the  accrued  interest  on  the  first 
mortgage  6%  bonds  for  the  fiscal  year  ending 
June  30,  1918* 

CLOSING  ENTRIES 

(1) 

Raw  Materials  Used  $150,000.00 

To — Raw  Materials  Purchased  $150,000.00 

Cost  value  of  raw  materials  used  per  store- 
keeper's distribution  report. 

w 

Manufacturing  Account  220,050.00 

Discounts  Received  1,200.00 

To— Raw  Materials  Used  150,000.00 

Mill  Labor  29,475.00 

Heat  and  Power  4,200.00 

Taxes  750.00 

Factory  Expenses  2,550.00 

Sundry  Materials  and  Supplies                    7,400.00 

Depreciation  26,875.00 
To  close  manufacturing  expense  accounts, 

(3) 
Cement  Stock  Account  220,050.00 

To — Manufacturing  Account  220,050.00 

To  transfer  cost  of  manufacturing  cement. 

(4)  . 
Cost  of  Cement  Sold  193,644.00 

To — Cement  Stock  Account  193,644.00 

To  debit  Cost  of  Cement  Sold  account  with 
the  cost  value  of  220,000  barrels  of 
cement  sold  during  the  year  ending 
June  30,  1918. 

Copyright,  1919,  The  Ronald  Press  Company 


II-17-8 


Trading  Account 

To — Cost  of  Cement  Sold 
Discounts  Allowed 
To  close  latter  accountSt 


Sales 

To~Trading  Account 
To  close  Sales  account* 


(5) 


(6) 


$195,044.00 


184,875.00 


$193,644.00 
1,400,00 


184,875.00 


(7) 

Profit  and  Loss  Account  10,169.00 

To — Trading  Account  10, 169. 00 

To  transfer  gross  loss  on  sales  to  Profit 
and  Loss  account, 

(8) 

Profit  and  Loss  Account  15,998.75 

Interest  on  Bills  Receivable,  etc.  900.00 

To — Office  Salaries  and  Expenses  5,175.00 

Bad  and  Doubtful  Accounts  1,848.75 

Interest  on  Notes  Payable  3,875.00 

Bond  Interest  6,000.00 

To  transfer  sundry  accounts  to  Profit 

and  Loss. 

(9) 

Deficiency  Account  26,167.75 

To — Profit  and  Loss  Account  26,167.75 

To  transfer  total  loss  for  year  ending 
June  30,  1918,  to  Deficiency  account. 

references: 

Montgomery,  pages  59-71;  296-312 
Wildman,  pages  21-41 ;  78-101 


Copyright,  1919,  The  Ronald  Press  Company 


II-17-9 


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11-17-10 


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Copyright,  1919,  The  Ronald  Press  Company 


II-18-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  18 
RECEIVABLES 


Problem  39 

From  the  following  balance  sheets  of  the  A  X  Company  prepare  a  statement 
showing  application  of  funds  during  the  year  1917: 


ASSETS 


DEC.  31,  1916 

DEC.  31,  1917 

$  15,000.00 

(1) 

$  20,000.00 

250,000.00 

250,000.00 

305,000.00 

(2) 

315,000.00 

65,000.00 

(3) 

71,500.00 

15,000.00 

30,000.00 

88,000.00 

65,500.00 

104,000.00 

86,000.00 

2,500.00 

18,100.00 

5,000.00 

4,000.00 

12,000.00 

11,000.00 

$861,500.00 

$871,100.00 

$150,000.00 

$175,000.00 

Land 

Buildings 

Machinery  and  Equipment 

Investments  (Temporary) 

Treasury  Stock  (Preferred) 

Inventories 

Accounts  Receivable 

Cash 

Prepaid  Expenses 

Unamortized  Bond  Discount 


LIABILITIES 
Capital  Stock — Common  (Authorized,  $500,000) 
Capital  Stock — Preferred  (Authorized,  $150,000; 

to  be  redeemed  and  canceled  at  the  rate  of 

$15,000  per  year,  commencing  December  31, 

1916) 
First  Mortgage  Bonds  (sold  at  80;  due  January 

1,  1929) 
Accounts  Payable 
Sinking  Fund  Reserve 
Reserve  for  Depreciation 
Surplus  January  1,  1917 
Surplus  Net  Profits  1917 


NOTES— 

(1)  Increase  caused  by  entry  crediting  Prof  it  and  Loss,  1917. 


150,000.00 

150,000.00 

200,000.00 

200,000.00 

145,000.00 

62,000.00 

80,000.00 

90,000.00 

45,000.00 

(2) 

58,000.00 

91,500.00 

(4) 

83,400.00 
52,700.00 

$861,500.00 

$871,100.00 

Copyright,  1919,  The  Ronald  Press  Company 


II-18-2 


(2)  Equipment  discarded  fn  1917  (no  scrap),  $25,000;  charged  to  Reserve 

for  Depreciation. 

(3)  A  dividend  of  10%  on  the  temporary  investment  of  $65,000  was  declared 

December  20,  1917,  payable  February  1,  1918. 

(4)  Dividend  of  Q%   on  preferred  stock  declared  and  paid  January  5,  1917f 

Problem  40 

The  Western  Manufacturing  Co.  is  engaged  in  the  manufacture  of  a  bulk 
product.  At  December  31,  1918,  the  trial  balance  abstracted  by  the  bookkeeper 
was  as  follows: 


PARTICULARS 
Plant 

Inventory  of  Raw  Material  January  1,  1918 
Inventory  of  Work  in  Progress  January  1,  1918 
Inventory  of  Finished  Product  January  1,  1918 
Customers'  Accounts 
Cash  in  Bank  and  on  Hand 
Insurance  Unexpired 
Capital  Stock  (Authorized  $400,000) 
Surplus 

First  Mortgage  6%  Gold  Bonds  Issued 
Accounts  Payable 
Reserve  for  Depreciation 
Materials  Purchased 
Direct  Labor 
Heat ,  Light ,  and  Power 
Miscellaneous  Factory  Expenses 
Discount  on  Sales 
Office  Salaries  and  Expenses 
Salesmen's  Salaries  and  Expenses 
Sales 

Return  Purchases  of  Materials 
Miscellaneous  Income 


DEBIT 
$400,000.00 
40,000.00 
10,000.00 
12,500.00 
48,000.00 
11,500.00 

1,200.00 


168,000.00 

40,000.00 
3,500.00 

12,500.00 
7,000.00 

21,000.00 

62,000.00 


CREDIT 


$350,000.00 

51,000.00 

150,000.00 

35,000.00 

10,000.00 


228,000.00 
8,500.00 
4,700.00 


$837,200.00  $837,200.00 


Allow  1%   for  depreciation;  13^%  of  outstanding  accounts  receivable  for  bad 
debts;  6%  per  annum  for  accrued  bond  interest;  and  $500  for  accrued  wages. 

Twelve  thousand  five  hundred  tons  of  finished  product  having  a  market  value 
of  $12,250  were  on  hand  at  January  1,  1918;  200,000  tons  were  produced  during 
the  year;  190,000  tons  were  sold.  The  market  price  at  December  31,  1918,  was 
$1.50  per  ton.  At  December  31,  1918,  the  inventories  of  raw  material  and  work 
in  progress  aggregated  $10,000  and  $6,000,  respectively. 

Prepare : 

(a)  Balance  sheet 

(b)  Statement  of  profits  and  income 

(c)  Statement  of  cost  of  manufacture 

(d)  Finished  stock  account 


Copyright,  1919,  The  Ronald  Press  Company 


II-18-3 


QUESTIONS  ON  AUDITING 


Question  101 — State  the  procedure  you  would  adopt  to  verify  the  customers* 
accounts  receivable  and  satisfy  yourself  as  to  the  sufficiency  of  the  reserve 
provided  for  bad  and  doubtful  accounts. 

Question  102 — A  wholesale  house  employs  collectors,  whose  business  it  is 
to  call  on  customers  of  the  house  within  a  radius  of  ten  miles  from  their  office 
and  collect  outstanding  accounts.   You  are  asked  to  design  a  system  to  prevent 
peculation  on  their  part.  Indicate  the  nature  of  the  system  you  would  advocate. 

Question  103 — In  a  detailed  audit  to  what  extent  do  you  consider  it  advisable 
to  check  the  debits  to  the  accounts  in  the  customer's  ledger?  State  the  object 
to  be  attained  by  such  a  check. 

Question  104 — How  would  you  satisfy  yourself  as  to  the  accuracy  of  the 
officers'  accounts  appearing  on  the  balance  sheet? 

Question  105~How  would  you  audit  the  Notes  Receivable  shown  by  the  balance 
sheet  of: 

(a)  Agricultural  implement  manufacturer 

(b)  Retail  department  store 


Solution  to  Problem  35 


M  COMPANY 
COMPARATIVE  BALANCE  SHEETS 
AS  AT  DECEMBER  31,  1917  AND  1918 


ASSETS 


Real  Estate,  Buildings 
Machinery,  Tools,  Fixtures 
Horses  and  Wagons 
Inventories 
Customers'  Accounts 
Notes  Receivable 
Cash  on  Hand  and  in  Bank 
Prepaid  Insurance  Premiums 
Prepaid  Interest 


DEC. 31,  1917 

$  60,000.00 

85,000.00 

20,000.00 

65,000.00 

40,000.00 

15,000.00 

5,000.00 

1,000.00 

500.00 


DEC. 31, 1918 

$  65,000.00 

90,000.00 

25,000.00 

129,000.00 

45,000.00 

9,000.00 

9,000.00 

1,200.00 

200.00 


INCREASE 

$  5,000.00 

5,000.00 

5,000.00 

64,000.00 

5,000.00 

4,000.00 
200.00 


DECREASE 


$6,000.00 


300.00 


1291.500.00  $373,400.00    $88,200.00   $6,300.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-18-4 


Capital  Stock 

First  Mortgage  6%  Bonds 

Bank  Loans 

Trade  Creditors 

Sundry  Accounts 

Surplus 


LIABILITIES 

1150,000.00  $150,000.00 
50,000.00    50,000.00 


45,000.00 

15,000.00 

2,000.00 

29,500.00 


60,000.00 

25,000.00 

4,000.00 

84,400.00 


115,000.00 

10,000.00 

2,000.00 

54,900.00 


$291,500.00  $373,400.00    $81,900.00 


CHANGE  IN  FINANCIAL  CONDITION 

The  profits  for  the  year  under  review  were  applied  in  the  following 
Banner: 


1.  Dividends  declared  and  paid 

2.  Increase  in  Capital  Assets,  represented  in; 

Real  Estate  and  Buildings 
Machinery,  Tools,  Fixtures 
Horses  and  Wagons ' 

3*  Increase  in  the  Working  Capital  as  shovn 
in  the  following  table 

Total 


$5,000.00 
5,000.00 
5,000.00 


$40,000.00 

15,000.00 

39,900.00 

$94,900.00 


CURRENT  ASSETS: 
Inventories 
Customers*  Accounts 
Notes  Receivable 
Cash  on  Hand  and  in  Bank 
Prepaid  Insurance  Premiums 
Prepaid  Interest 


DECEMBER  31 
1917         1918 
%   65,000.00  $129,000.00 
40,000.00    45,000.00 


15,000.00 

5,000.00 

1,000.00 

500.00 


9,000.00 

9,000.00 

1,200.00 

200.00 


INCREASE    DECREASE 
$64,000.00 
5,000.00 

$6,000.00 
4,000.00 
200.00 

300.00 


$126,500.00  $193,400.00    $73,200.00  $6,300.00 


LESS— CURRENT  LIABILITIES: 

Bank  Loans  $  45,000.00   $  60,000.00 

Trade  Creditors,  etc.        17,000.00    29,000.00 


$15,000.00 
12,000.00 


Total  Current  Liabilities   $  62,000.00  $  89,000.00    $27,000.00 


BALANCE—Working  Capital     $  64,500.00  $104,400.00 


Net  Increase  (as  above) 


$39,900.00 


$46,200.00  $46,200.00 


Copyright,  1919,  The  Ronald  Press  Company 


Solution  to  Problem  36 

A  A1]DB 
BALANCE  SHEET,  JUNE  30,  1919 

ASSETS 
CURRENT  ASSETS: 
Cash 

Accounts  Receivable  $48,500.00 

LESS — Reserve  for  Bad  Debts  and 

Discounts  4,8.50.00 


•  II-18-5 
Exhibit  I 


Merchandise  Inventory 

CAPITAL  ASSETS: 

Plant,  Tools,  and  Equipment  $37,000.00 

LESS — Reserve  for  Depreciation       1,850.00 

Leasehold  (11,250.00 

LESS — Amount  charged  off  1,687.50 

GOOD-WILL 


$10,035.00 

43,650.00 

19,000.00  I  72,685.00 


$35,150.00 


9,562.50    44,712.50 
33,613.89 


$151,011.39 


LIABILITIES  AND  NET  WORTH 


CURRENT  LIABILITIES: 
Accounts  Payable 
Due  to  C 

NET  WORTH: 

A — Capital  Account 
B — Capital  Account 


$46,975.00 
57,088.06  $104,063.06 


$23,474.17 
23,474.16    46,948.33 


$151,011.39 


A,  B,  AND  C 

STATEMENT  OF  PROFITS  AND  INCOME 
FOR  YEAR  ENDING  JUNE  30,  1919 
MERCHANDISE  SALES 
Cost  of  Sales  (Exhibit  III) 

GROSS  PROFIT  ON  SALES 
DEDUCT—GENERAL  EXPENSES : 
General  Expense 
Provision  for  Bad  Debts 

NET  PROFIT  FROM  OPERATIONS 
ADD — Inventory  Reserve  at  July  1,  1918,  written  back 


SURPLUS  NET  PROFIT  for  year 

Copyright,  1919.  The  Ronald  Press  Company 


$3,900.00 
4,850.00 


Exhibit  II 


$137,970.00 
91,017.50 

$  46,952.50 


8,750.00 

$  38,202.50 
13,470.00 

$  51,672.50 


II-18-6 


Exhibit  III 


A,  B,  AND  C 
STATEMENT  OF  COST  OF  GOODS  SOLD 
FOR  YEAR  ENDING  JUNE  30,  1919 

Inventory  as  at  July  1,  1918  $  25,470.00 

Purchases  69,510.00 

Wages  11,500.00 
Depreciation  on: 

Plant,  Tools,  and  Equipment  $1,850.00 

Leasehold  1,687.50     3,537.50 


$110,017.50 
DEDUCT — Inventory  as  at  June  30,  1919  19,000.00 


COST  OF  GOODS  SOLD  (Exhibit  II)  $  91,017.50 


ACCOUNT  WITH  RETIRING  PARTNER 

Balance  as  at  June  30,  1919,  before  inclusion  of  allowance  in  re- 
spect of  Good-Will  and  exclusive  of  drawings  $20,000.00 
ADD — Two  years*  purchase  of  Good-Will  as  per  statement 

below  $33,613.89 

Proportion  of  Surplus  Net  Profits  for  the  year 

ending  June  30,  1919  17,224.17    50,838.06 


$70,838.06 
DEDUCT— Withdrawals  13,750.00 


Balance  at  June  30,  1919,  per  adjusted  Balance  Sheet  $57,088.06 


STATEMENT  SHOWING  METHOD  OF  DETERMINING  GOOD-WILL 

PROFITS  FOR  YEAR  ENDING  JUNE  30: 

1917  $44,540.00 

1918  55,050.00 

1919  51,772.50  $151,362.50 


Equivalent  to  AN  ANNUAL  AVERAGE  OF  $  50,420.83 


BASIS  OF  TWO  YEARS'  PURCHASE  equals        $100,841.66 


Of  which  C»s  share  is  equal  to  1/3,  or      $  33,613.89 

Comments  on  Problem  36 

1.  The  inventory  reserve  of  $13,470  had  been  created  out  of  the  profits  of 
some  one  of  the  three  years  ending  June  30,  1919;  and  since  it  is  no  longer  re- 
quired, is  a  credit  to  the  Profit  and  Loss  accoimt  of  that  period. 

Copyright,  1919,  The  Ronald  Press  Company 


I 


II-18-7 

ANSWERS  TO  QUESTIONS 

Answer  to  Question  91—An  audit  may  be  said  to  be  such  an  examination  of  the 
books,  accounts,  and  vouchers  of  a  business  as  shall  enable  the  auditor  to 
satisfy  himself  as  to  whether  or  not  the  balance  sheet  and  relative  statement 
of  profits  and  income  are  properly  drawn  up,  so  as  to  exhibit  a  true  and  correct 
view  of  the  state  of  the  affairs  of  the  business  at  the  closing  date  and  the 
results  from  operations  for  the  period  under  review,  according  to  the  best  of 
his  information  and  the  explsmations  given  to  him  and  as  shown  by  the  books;  and 
if  not,  in  what  respect  they  are  untrue  or  incorrect* 

Answer  to  Question  92 — 

(a)  The  objects  of  an  audit  may  be  said  to  be: 

1.  To  ascertain  the  actual  financial  condition  and  earnings  of  an 

enterprise  for: 

a)  Its  proprietors  (individual,  partners,  or  stockholders) 

b)  Its  executives  (managers,  officers,  or  directors) 

c)  Bankers  or  investors  who  have  purchased  securities  or 

loaned  funds  or  conteuplate  doing  so 

2.  Detection  of  fraud  through: 

a)  Misappropriation  of  moneys  or  goods  by  employees 

b)  Manipulation  of  accounts  so  as  to  alter  the  financial  re- 

sults for  the  year 

5.  Detection  of  errors  involving: 

a)  Errors  of  principle 

b)  Clerical  errors 

c)  Errors  of  omission 

d)  Errors  of  commission 

e)  Offsetting  errors 

(b)  Some  of  the  advantages  derived  from  an  audit,  aside  from  those  which 
obviously  follow  the  objects  enumerated  in  (a)  are: 

1.  The  condition  of  the  business  is  accurately  stated  by  an  outside 

person  and  the  result  is  sometimes  a  revelation  to  those  who 
believed  they  were  familiar  with  every  detail  of  the  business. 

2.  Bank  loans  may  be  more  easily  obtained,  as  the  lender  has  greater 

confidence  in  the  financial  conditions  set  out  and  the  earnings 
from  operations  for  the  fiscal  period. 

3.  Facilitates  the  sale  of  a  business  in  that  the  prospective  pur- 

chaser insists  upon  a  correct  statement  of  facts  before  he  will 
complete  the  transaction. 

4.  Where  bonds  have  been  issued,  the  trustee  requires  a  periodical 

audit  to  assure  himself  that  the  covenants  in  the  trust  deed  are 
being  properly  carried  out. 

5.  In  case  of  partnerships,  an  audit  assures  the  proper  carrying  out 

of  the  stipulations  contained  in  the  partnership  agreement  and 
consequently  avoids  subsequent  disputes. 

Copyright,  1919,  The  Ronald  Press  Company 


II-18-8 

6.  In  case  of  fire  loss,  certified  accounts  are  of  assistance  in 

effecting  an  adequate  settlement. 

7.  Is  generally  required  by  company  bonding  employees,  and  in  any 

case  reduces  the  cost  of  such  bonds. 

8.  Where  the  accounts  are  published  for  the  benefit  of  the  stock- 

holders, the  auditor's  certificate  is  the  sole  means  available 
whereby  the  stockholders  may  assure  themselves  that  the  accounts 
as  presented  by  the  directors  are  in  fact  true  accounts. 

9.  When  fair  rates  are  to  be  decided  upon,  it  is  to  the  advantage  of 

the  public  service  corporation  to  present  audited  accounts  so  as 
to  assure  the  public  that  the  earnings  stated  are  in  fact  the 
true  earnings. 

10.  Deterrent  and  moral  effect  of  an  audit. 

Answer  to  Question  93 — It  is  not  the  business  of  an  auditor  to  balance  the 
books,  and  he  must  take  care  to  relieve  himself  of  any  responsibility  for  errors 
in  balancing.   Frequently  the  auditor  is  requested  to  balance  the  accounts, 
but  if  he  does  this  work,  it  is  in  his  capacity  as  accountant,  and  not  as  auditor, 
and  should  be  subject  to  a  separate  arrangement. 

In  order  to  discover  an  error  in  a  trial  balance,  if  asked  to  do  so,  the 
first  thing  an  auditor  would  do  is  to  ascertain  whether  the  customers  and 
creditors  ledgers  have  been  separately  proved  and  if  so  whether  the  difference 
on  the  books  is  represented  by  the  difference  on  either  the  customers  or  credi- 
tors ledgers.  Assuming  these  to  have  been  agreed,  the  difference  must  arise 
in  the  general 'ledger,  and  the  trial  balance  should  be  checked  and  footed.  It 
should  be  seen  that  the  balances  at  the  commencement  of  the  period  in  these 
ledgers  are  brought  down,  as  frequently  outstandings  brought  forward  from  one 
period  to  another  are  overlooked. 

If  the  error  is  capable  of  being  interpreted  as  a  misposting,  all  items  of 
that  amount  should  be  checked.   Should  the  error  not  then  be  discovered,  the 
whole  of  the  posting^,  footings,  and  forwarding  figures  must  be  checked. 

Assuming  tha  general  trial  balance  to  be  correct,  but  the  difference  to 
reside  in  either  the  customers  or  creditors  ledgers,  the  balances  of  these 
ledgers  must  be  checked  and  the  trial  balance  footed. 

If  the  difference  still  remains  undiscovered  the  total  accounts  must  then 
be  proved.   The  fact  that  the  inclusion  of  the  balances  on  them  causes  the 
general  trial  balance  to  agree  will  not  of  itself  prove  the  accuracy  of  the  total 
accounts,  since  if  the  footings  of  the  subsidiary  books,  such  as  the  sales 
record,  are  erroneous,  a  compensating  error  will  have  been  made,  the  total  to 
the  credit  of  Sales,  end  to  the  debit  of  Customers  Ledger  account  being  in- 
correct.  The  general  trial  balance,  therefore,  will  not  be  affected,  and  the 
Customers  Ledger  controlling  account  will  not  agree  with  the  customers  ledger 
balEinces. 

The  total  accounts  having  been  proved  to  be  correct  by  checking  all  foot- 
ings and  forwarding  figures  in  the  subsidiary  books,  and  the  error  not  having 
been  discovered  by  this  or  any  other  method,  an  analysis  of  the  ledgers  must  be 
resorted  to,  the  totals  of  the  analysis  being  proved  with  the  totals  of  the 
subsidiary  books. 

Copyright,  1919,  The  Ronald  Press  Company 


II-18-9 

The  foregoing  outline  is  necessarily  limited.   The  exact  procedure  in  any 
particular  case  must  of  course  depend  largely  on  the  nature  of  the  business  and 
the  character  of  the  accounting  system. 

Answer  to  Question  94— The  work  involved  in  an  audit  is  of  a  critical  nature, 
and  comprises  an  examination  of  the  books  and  accounts  for  the  purpose  of  ascer- 
taining whether  the  balance  sheet  and  relative  statement  of  profits  and  income 
are  properly  drawn  up.  All  other  work  in  connection  with  the  accounts,  such 
as  the  drafting  and  preparation  of  the  final  accounts,  balancing  of  books,  writ- 
ing up  books,  etc.,  is  accountancy  work,  and  does  not  form  part  of  the  duties 
of  an  auditor.   In  short,  auditing  is  the  analytical,  as  practical  accounting 
is  the  constructive  branch  of  accountancy. 

If  instructed  by  a  private  firm  to  perform  accountancy  work,  the  client's 
requirements  should  be  formulated  in  writing  and  the  accountant  should  take 
care  that  the  limits  of  his  responsibilities  are  clearly  defined. 

Answer  to  Question  95 — The  legal  responsibilities  of  an  auditor  are  stated 
by  Montgomery  to  be  as  follows: 

■SUMMARY  OF  DECISIONS— 

■Based  upon  the  English  decisions  and  upon  the  principles  of  the  common 
law  in  force  in  the  United  States,  the  professional  auditor's  legal  duties 
and  liabilities  may  be  summarized  as  follows: 

■1.  Anyone  who  holds  himself  out  as  skilled  in  a  profession  is  charged  with 
a  higher  degree  of  responsibility  than  one  who  is  inexperienced  and  who  does 
not  seek  professional  work.  Acting  in  a  professional  capacity,  an  auditor  must 
do  more  than  ascertain  the  mere  arithmetical  accuracy  of  the  accounts.  If  the 
accounts  do  not  represent  the  true  financial  position  of  the  undertaking  under 
examination,  and  if  that  fact  is  apparent  or  can  reasonably  be  deduced  from  the 
face  of  the  accounts  themselves,  then  the  auditor  is  under  a  legal  obligation 
to  discover  and  disclose  the  true  state  of  affairs. 

■2.  The  auditor,  however,  is  not  an  insurer  unless  he  assumes  such  a 
position.  If  he  uses  reasonable  care — the  care  of  an  ordinarily  skilful 
auditor,  under  the  circumstances  of  the  case — no  legal  responsibility  is  in- 
curred by  him. 

■3.  Reasonable  care  has  been  stated  by  the  courts  to  depend  upon  the  cir- 
cumstances of  each  case.   Where  there  is  no  reasonable  ground  for  suspicion  of 
fraud,  it  is  not  necessary  to  take  as  many  precautions  as  are  requisite  where 
the  auditor  is  led  to  believe  that  irregularities  exist. 

■4.  Ordinarily  what  is  known  as  a  'test  and  scrutiny'  audit  is  sufficient, 
but  in  every  case  there  must  be  a  careful  survey  of  the  assets,  the  liabilities, 
the  income,  and  the  expenses,  in  order  that  the  auditor  may  satisfy  himself 
that  the  assets  and  the  income  are  accounted  for,  and  that  the  liabilities  and 
expenses  are  properly  supported.   The  auditor  need  not  verify  every  item,  but 
he  must  not  omit  any  part  of  an  audit  which  the  custom  of  the  profession  decrees 
should  be  covered. 

■5.  The  experience  of  other  practitioners  and  access  to  recognized  authori- 
ties on  the  subject  being  available,  a  defense  of  ignorance  as  to  what  is  re- 
Copyright,  1919,  The  Ronald  Press  Company 


11-18-10 

quired  in  an  audit  will  not  save  an  auditor  from  responsibility  for  failure  to 
follow  settled  rules  of  practice. 

■6.  The  general  rule  of  the  common  law,  that  all  men  are  considered  honest 
until  proved  dishonest,  may  be  observed  by  an  auditor  with  respect  to  the  staff 
of  the  client ;  but  he  is  charged  with  an  exceptional  degree  of  diligence  in 
recognizing  indications  of  dishonesty  on  the  part  of  those  who  occupy  respon- 
sible positions. 

■7.  An  auditor's  relation  to  his  client  is  in  the  highest  degree  confiden- 
tial, and  he  has  no  legal  right  to  communicate  with  third  parties  (debtors  or 
creditors)  unless  he  secures  permission  to  do  so.   If  his  position  as  auditor 
becomes  incompatible  with  honesty,  he  may  withdraw  at  any  time,  but  he  is  not 
at  liberty  to  disclose  to  outsiders  the  cause  of  his  withdrawal. 

■8,  In  communicating  with  his  client,  however,  the  auditor  is  bound  to 
disclose  information,  of  whatever  nature  it  may  be,  which  is  of  value  to  the 
client,  and  any  suppression  of  material  facts  is  at  his  own  risk. 

"9.  In  the  event  of  loss  through  an  auditor's  negligence,  the  client  may 
recover  damages  against  him.   The  measure  of  damages  is  the  amount  which  the 
client  or  other  interested  party  has  lost  as  a  legal  consequence  of  the  auditor's 
failure  to  perform  his  duty  properly." 

REFERENCES : 

Montgomery,  pages  71-84 
Wildman,  pages  42-43;  135-142 


Copyright,  1919,  The  Ronald  Press  Company 


11-18-11 


I 


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II-19-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  19 
INVENTORIES 


Problem  41 

The  operations  of  the  Reliable  Machine  Co*  for  the  month  of  April  consisted 
of  the  following: 

1*  Materials  used  $39,083.27,  productive  labor  |38,092.78,  and  general 
foundry  expenses  $19,027.83  for  the  month  of  March,  these  expen- 
ditures representing  the  cost  of  producing  1,200,000  pounds  of 
castings  during  that  month. 

2.  Castings  produced  on  the  following  orders S 

ORDER  NO.  POUNDS 

196  .      304,000 

198  100,000 

203  98,000 

206  350,000 

209  175,000 

Charge  each  of  these  orders  with  the  cost  of  the  castings 
based  upon  the  average  cost  per  pound  for  the  month  of  March. 


3.  General  stores  issued S 

'^ 

ORDER  NO. 

VALUE 

196 

$11,088.12 

198 

9,001.33 

201 

12,081.32 

207 

11,091.33 

208 

31,083.27 

212 

13,827.23 

215 

9,038.11 

4.  Productive  labor: 

MACHINE  SHOP 

ORDER  NO. 

Hours 

Amount 

196 

11, 

,000 

$4,608.07 

198 

10, 

,000 

3,812.08 

201 

13. 

,000 

5,708.91 

207 

14. 

,000 

6,103.27 

208 

52, 

,000 

18,081.33 

212 

16, 

000 

6,308.-^2 

215 

10. 

,500 

4,108.27 

Copyright.  1919,  The  Ronald  Press  Company 


II-19-2 


5.  General  factory  expenses  $38,083.11,   Distribute  the  factory- 
expenses  against  the  various  orders  upon  the  basis  of  the 
machine  hours. 

6>  Ihe  following  orders  were  shipped: 

ORDER  NO.  SELLING  PRICE 

196  $35,000.00 

198  21,000.00 

206  35,000.00 

209  20,000,00 

Prepare  all  of  the  necessary  entries  in  respect  of  the  foregoing. 

Problem  42 

The  John  Anson  Co.  is  a  corporation  engaged  in  the  commission,  business  and 
deals  exclusively  in  butter,  all  of  which  is  received  on  consignment.   Their 
balance  sheet  on  July  1,  1919,  follows: 

JOHN  ANSON  COMPANY 
BALANCE  SHEET,  JULY  1,  1919 

ASSETS 
CURRENT  ASSETS: 

Cash  $8,747.61 

Accounts  Receivable  (Less — Reserve  for  Discounts, 

$150)  8,965,42 

Merchandise  on  Hand  4,545.67  $22,258.70 


% 


PREPAID  INSURANCE  889.61 

FURNITURE  AND  FIXTURES  $3,745.00 

Less — Reserve  for  Depreciation  2,400.00    1,345.00 


$24,493.31 


LIABILITIES 
CURRENT  LIABILITIES: 

Accounts  Payable  fort 

Freight  $   15,50 

Cartage  26,72 

Miscellaneous  Charges  15.00 

General  Expenses  18.71 

Accrued  Taxes  221,74 

Sales  on  Consignments  not  closed  out  (less — 
Freight  $87.45,  Cartage  $4.16,  and  Drafts 
$961,75)  6,420.82  $  6,718.49 


Copyright,  1919,  The  Ronald  Press  Company 


NET  WORTH: 

Capital  Stock 

Surplus — Balance  June  1,  1919 
Profits  for  June  (including  gross  profit  of 
(1, 140. 71  on  consignments  partially  sold) 


II-19-3 


10,000.00 


$5,346.68 
2,428.14    7,774.82 


$24,493.31 


Three  books  of  account  are  kept:  cash 
register.  In  addition,  a  memorandum  ace 
ment  on  a  separate  sheet ;  when  advances  ( 
the  amounts  are  carried  to  the  consignme 
paid  and  thus  closed  out  the  sheet  is  f il 
basis  for  preparing  an  account  sales.  Th 
tomers,  all  of  whom  settle  their  account 
The  term  "merchandise"  as  used  here  refer 
thereof  which  the  business  pays  for  on  i 
tomers  in  the  usual  way.  The  cash  book, 
are  columnar  in  form  and  admit  of  the  f o 
July,  1919; 


book,  sales  book,  and  account  sales 
ount  is  opened  up  with  each  consign- 
drafts  or  expenses)  or  sales  are  made 
nt  sheet,  and  when  the  consignment  is 
ed  away  after  having  served  as  the 
ere  are  only  a  few  dozen  credit  cus- 
s  weekly;  hence  no  ledgers  are  kept, 
s  to  certain  consignments  or  portions 
ts  own  behalf  and  sells  to  its  cus- 
sales  book,  and  account  sales  register 
llowing  information  for  the  month  of 


CASH  BOOK 


CASH  RECEIPTS 
Cash  Balance,  July  1,  1919   $  8,747.61 
Customers*  Ac- 
counts      $28,673.92 
Discounts  Al- 
lowed 768.50  27,905.42 


311.42 
3,020.23 


Cash  Sales — Merchandise 
Cash  Sales — Consignments 
Interest  on  Bank  Balance, 

July 
Cash  in  Exchange  for  checks 

issued  (per  contra)  341.00 


10.05 


CASH  DISBURSEMENTS 

Charged  to  Consignments: 

Freight  $   540.60 

Cartage  112.84 

Storage  57.50 

Miscellaneous  157.98 

Drafts  9,749.23 

Net  Proceeds  17,337.75 

Selling  and  General  Expenses: 

Clerks'  Salaries  475.00 

Office  Salaries  330.00 

Rent  125.00 

Postage  and  Stationery        53.67 
Insurance  110.00 

General  Expenses  74.86 

Checks  in  exchange  for  cash 

(per  contra)  341.00 

Cash  Balance,  July  31,  1919  10,870.30 


$40,335.73 


$40,335.73 


Copyright,  1919,  The  Ronald  Press  Company 


II-19-4 


SALES  BOOK 
(Does  not  include  Cash  Sales) 


Merchandise  Sales 
Consignment  Sales 


$  5,337.89 
30,014.55 


ACCOUNT  SALES  REGISTER 


DEBITS 

Freight  $   436.82 

Cartage  114,45 

Storage  57.50 

Miscellaneous  142.98 

Drafts  9,462.47 

Net  Proceeds  17,337.75 

Gross  Profit  (Commission)  2,586.09 

$30,138.06 


CREDITS 
Merchandise  Purchases 
Consignment  Sales 


$  5,463.81 
24,674.25 


$30,138.06 


An  examination  of  the  sheets  on  the  consignments  not  yet  closed  out  yielded 
the  following  summary: 


DEBITS 


Freight 
Cartage 
Drafts 


CREDITS 
;  190.55   Sales  (of  which  it  is  esti- 
13.43    mated  $2,111.16  is  gross 
1,248.51    profit) 


$16,975.42 


There  are  accounts  payable  on  July  31  on  account  of:  freight,  $14.82; 
cartage,  $37.60;  general  expense,  $44.66;  additional  taxes  accrued  during 
July,  $35.16.   It  is  expected  that  customers  will  take  advantage  of  discount 
to  the  extent  of  $275;  additional  depreciation  has  accrued  on  furniture  and 
fixtures  of  $100;  insurance  has  expired  amounting  to  $42.78.   The  merchandise 
on  hand  at  July  31  is  $5,473.82. 

From  the  above  information  prepare  a  detailed  statement  of  profit  and  loss 
for  the  month  of  July  and  a  balance  sheet  as  of  July  31,  1919, 


QUESTIONS 

Question  106 — Outline  the  procedure  you  would  follow  if  called  upon  to  audit 
the  raw  material  inventory  of  an  automobile  manufacturing  company. 

Question  107 — In  auditing  the  accounts  of  a  steel  products  manufacturing 
company  would  you  consider  it  proper  under  any  circumstances  to  allow  the 
Profit  and  Loss  account  to  be  credited  with  profit  on  uncompleted  work? 

Question  108 — What  steps  would  an  auditor  take  in  the  verification  of  inven- 
tories of  finished  products? 


Copyright,  1919,  The  Ronald  Press  Company 


II-19-5 

Question  109 — Where  an  auditor  is  engaged  in  verifying  the  finished  product 
inventory  of  a  bicycle  manufacturer,  to  what  extent  is  he  justified  in  relying 
upon  the  cost  records  to  determine  the  cost  of  such  inventories? 

Question  110 — What  do  you  understand  by  the: 

(a)  Gross  profit  test 

(b)  Comparative  inventory  test 

State  how  these  tests  would  be  applied  in  a  manufacturing  concern. 

Solution  to  Problem  37  Exhibit  I 

A  B  CO. 
BALANCE  SHEET,  JANUARY  1,  1919 

ASSETS 
CAPITAL  ASSETS: 

Plant  I  250,000.00 

CURRENT  ASSETS: 

Inventory  (after  deducting  reserve  for  discounts 

of  516.000)  $304,000.00 

Accounts  Receivable  $400,000.00 

DEDUCT— 

Bad  Debt  Re- 
serve      I  4,000.00 
Reserve  for 

Discounts     16,000.00    20,000.00   380,000.00 


Notes  Receivable  30,000.00 

Cash  50,100.00     764,100.00 


DEFERRED  CHARGES: 

Prepaid  Interest  18,000.00 


$1,032,100.00 


LIABILITIES 
CAPITAL  STOCK  ISSUED  AND  OUTSTANDING  $  225,000.00 

CURRENT  LIABILITIES: 

Notes  Payable  $600,000.00 

Accounts  Payable  (after  deducting  reserve  for 

discounts  of  $4,500)  85,500.00     685,500.00 


SURPLUS : 

Balance,  as  at  January  1,  1918  $  55,000.00 

ADD~Surplus  Net  Profits,  as  per  statement  of 
Profits  and  Income  (Exhibit  II)  for  year 
ending  January  1,  1919     '  66,600.00     121,600.00 


$1,032,100.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-19-6 


Exhibit  II 


A  B  CO. 
STATEMENT  OF  PROFITS  AND  INCOME 
YEAR  ENDING  JANUARY  1,  1919 

SALES  $1,500,000.00 

DEDUCT— Returns  $100,000.00 

Discounts  55,900.00     155,900.00 


NET  PROCEEDS  FROM  SALES  $1,344,100-00 

DEDUCT — Cost  of  Sales  (Exhibit  III)  1,064,000.00 


BALANCE— GROSS  PROFITS  $  280,100.00 
DEDUCT— GENERAL  AND  ADMINISTRATIVE  EXPENSES: 

Salaries  $  20,000.00 

Taxes  5,000.00 

Bad  Debts  3,000.00 

Expenses  156,000.00     184,000.00 


BALANCE— NET  PROFITS  FROM  OPERATION  $   96,100,00 

DEDUCT — Interest  paid  30,500.00 


$   65,600.00 


ADD — Miscellaneous  Income,  pertaining  to  prior  year's  operations; 

Credit  Insurance  on  1910  losses  1,000.00 


SURPLUS  NET  PROFITS  carried  to  Surplus  Account 

(Exhibit  I)  $   66,600.00 


Exhibit  III 


A  B  CO. 
STATEMENT  OF  COST  OF  SALES 
YEAR  ENDING  JANUARY  1,  1919 

INVENTORY  AT  JANUARY  1,  1918  (Less— Reserve  of  $12,000  for 

discounts)  $  228,000.00 

MERCHANDISE  PURCHASES  $1,250,000.00 

DEDUCT — Returns  $5*0 ,  000 .  00 

Discounts  taken  60,000.00     110,000.00   1,140,000.00 


$1,368,000.00 


DEDUCT — Inventory  at  January  1,  1919  (Less — Reserve  of  $16,000 

for  discounts)  304,000.00 


BALANCE— COST  OF  SALES  (Exhibit  II)  $1,064,000.00 


NOTE — Adjusting  journal  entries  are  not  called  for  by  the  problem,  but  the 
following  are  submitted  in  order  to  enable  the  students  better  to  understand 
the  effect  of  the  adjustments: 

Copyright,  1919,  The  Ronald  Press  Company 


II-19-7 


ADJUSTING  ENTRIES 


(1) 

Reserve  for  Discount  Accounts  Payable  |   500.00 

To — Purchase  Discounts  %       500.00 

To  increase  reserve  for  discounts  to  5%  on 
outstanding  accounts^ 

(2) 

Discounts  Allowed  Customers  4,000.00 

To — Reserve  for  Discount  Accounts 

Receivable  4,000.00 

To  increase  reserve  for  discounts  to  4%  of 
outstanding  Accounts  Receivable. 

(3) 
Bad  Debts  charged  off  1917  collected  500.00 

To — Reserve  for  Bad  Debts  500.00 

To  transfer  first-named  account, 

(4) 

Reserve  for  Bad  Debts  2,500.00 

To — Bad  Debts  charged  off  to  January 

1,  1919  2,500.00 

To  transfer  bad  debts  charged  off  to  reserve. 

(5) 

Bad  Debts  3,000.00 

To — Reserve  for  Bad  Debts  3,000.00 

Increase  reserve  to  1%   of  gross  Accounts 
Receivable  at  January  1,  1919. 

(6) 
Cost  of  Sales  Account  4,000.00 

To — Reserve  for  Discount  Merchandise 

Inventory  4,000.00 

To  close  latter  account. 

(7) 

Interest  12,500.00 

To — Prepaid  Interest  12,500.00 

To  close  latter  account,  interest  expiring 
July  1,  1918. 

(8) 

Prepaid  Interest  18,000.00 

To — Interest  18,000.00 

To  set  up  prepaid  interest  at  December 
31,  1919. 


Copyright,  1919,  The  Ronald  Press  Company 


II-19-8 

Solution  to  Problem  38 


Exhibit  I 


A— PROPRIETOR 
BALANCE  SHEET,  DECEMBER  31,  1917 


ASSETS 
CURRENT  ASSETS:  > 

Inventory  of  Mer- 
chandise        $25,000 
Accounts  Receivable   5,000 
Advances  to  Em- 
ployees 2,000 
Cash  on  hand         1,300  $33,300 


LIABILITIES  AND  DEFICIT 
LOANS  (subject  to  accrued  in- 
terest not  provided  for) 


FIXTURES  (subject  to  accrued 
depreciation  not  provided 
for) 


7,000 


John  Smith 
Mary  White 

ACCOUNTS  PAYABLE 

Total  Liabilities 


DEFICIT: 

Balance  at  January 

1,  1917  $  2,700 

Net  Loss  year  ending 

December  31,  1917 


$30,000 

6,000  $36,000 


15,000 


$51,000 


(Exhibit  II) 
Drawings 


5,000 

3,000  *10,700 


$40,300 


$40,300 


*  Red 

NOTES— 

(1)  The  Mary  White  item  of  $6,000  is  presumably  still  unpaid. 

(2)  Advances  to  employees  of  $2,000  have  been  taken  to  be  unpaid. 


A—PROPRIETOR 

STATEMENT  OF  PROFITS  AND  INCOME 

YEAR  ENDING  DECEMBER  31,  1917 

SALES 

DEDUCT—COST  OF  GOODS  SOLD: 

Merchandise  Purchases  $50,000.00 

Less— Inventory  December  31,  1917  25,000.00 


Exhibit  II 


BALANCE— GROSS  PROFITS 
DEDUCT— EXPENSES 

BALANCE— NET  LOSS  FOR  YEAR 


$40,000.00 

25,000.00 

$15,000.00 
20,000.00 

$  5,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-19-9 

ANSWERS  TO  QUESTIONS 

Answer  to  Question  96 — 

(a)  A  balance  sheet  audit  consists  of  such  an  examination  of  the  books, 
accounts,  and  vouchers  of  a  business  as  shall  enable  the  auditor  to  satisfy 
himself  as  to  whether  or  not  the  balance  sheet  is  properly  stated  so  as  to 
exhibit  a  true  and  correct  view  of  the  financial  condition  of  the  business  at  a 
certain  date.  The  general  audit  differs  from  the  balance  sheet  audit  in  that  the 
auditor  must  also  satisfy  himself  as  to  whether  or  not  the  statement  of  profits 
and  income  is  so  drawn  up  as  properly  to  set  out  the  results  from  operation  dur- 
ing the  period  under  audit.   The  scope  of  a  detailed  audit  would  require  in 
addition  thereto  a  detailed  check  of  vouchers,  checks,  postings,  and  footings. 

(b)  A  cash  audit  consists  of  such  an  examination  of  the  books,  accounts, 
and  vouchers  of  a  business  as  shall  enable  the  auditor  to  satisfy  himself  as  to: 

1.  Whether  all  cash  recorded  as  received  has  been  accounted  for  by  the 

receiving  agents. 

2.  Whether  all  cash  which  should  have  been  recorded  as  received  has 

as  a  matter  of  fact  been  so  recorded. 

3.  Whether  all  cash  recorded  as  disbursed  has  been  accounted  for  by  the 

disbursing  agents. 

4.  Whether  all  cash  recorded  as  disbursed  has  been  properly  authorized. 

Answer  to  Question  97 — See  Montgomery,  pages  53-58. 

Answer  to  Question  98 — Yes,  especially  if  the  footing  is  the  amount  posted 
to  the  ledger.  For  instance,  if  the  cash  disbursements  side  has  a  column  for  ex- 
pense, the  total  of  which  is  posted  to  the  debit  of  Expense  account,  the  raising 
of  the  footing  of  this  column  would  conceal  a  corresponding  shortage  in  cash,  and 
the  same  purpose  could  be  attained  by  increasing  the  footing  of  the  cash  receipts 
column. 

It  is  necessary  to  check  the  postings  to  see  that  the  items  in  the  ledger 
purporting  to  come  from  the  cash  book  are  in  fact  cash  book  entries,  and  not 
arbitrary  entries  made  for  the  purpose  of  balancing  the  ledger,  either  because 
the  bookkeeper  is  too  lazy  or  incompetent  to  locate  an  error,  or  to  conceal 
fraud. 

Answer  to  Question  99— The  following  steps  would  be  adopted  in  the  verifi- 
cation in  the  cash  balance  given  in  the  question: 

1.  A  certificate  would  be  obtained  from  the  bank  as  to  the  bank  balance 

of  $5,610. 

2.  A  B's  check  for  $400,  not  deposited,  would  be  traced  into  the  pass 

book  in  the  subsequent  period  to  see  that  it  actually  cleared  and 
was  good. 

3.  The  outst£inding  checks  represented  in  the  total  of  $2,500  would  be 

verified.  The  auditor  should  be  careful  to  note  that  the  entries 
in  respect  thereof  were  entered  in  the  cash  book  on  or  prior  to  the 
date  of  the  cash  verification. 

4.  The  cash  in  drawer,  amounting  to  $300,  would  be  counted  by  the 

auditor,  preferably  at  the  close  of  business  on  the  day  of  the 
verification. 

Copyright,  1919,  The  Ronald  Press  Company 


11-19-10 

Answer  to  Question  100 — As  part  of  the  verification  of  bank  balances  it  is 
necessary  to  trace  the  receipts,  per  cash  book,  with  the  deposits  per  pass  book 
in  order  to  insure  that  all  receipts  were  deposited  intact. 

To  illustrate  the  point,  a  cashier  might  be  short  $500  in  his  accounts 
during  the  year  and  knowing  that  an  audit  is  to  be  made  as  of  a  subsequent  date, 
v;ould  make  good  this  shortage,  temporarily  at  least,  by  depositing  the  amount 
before  the  close  of  business  on  the  last  day  of  the  period  to  be  audited.  On  the 
first  day  of  the  succeeding  period  the  amount  could  again  be  v/ithdrawn  by  an 
appropriation  of  receipts  for  that  day. 

Thus  the  balance  at  the  close  of  the  period  would  agree  with  the  cash  book, 
while  as  a  matter  of  fact  there  was  a  sum  of  $500  misappropriated. 

REFERENCES : 

Montgomery,  pages  84-99 
Wildman,  pages  108-119 


Copyright,  1919,  The  Ronald  Press  Company 


11-19-11 


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Copyright,  1919,  The  Ronald  Press  Company 


11-19-12 


Copyright,  1919,  The  Ronald  Press  Company 


11-19-13 


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Copyright,  1919,  The  Ronald  Press  Company 


11-19-14 


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Copyright,  1919,  The  Ronald  Press  Company 


II-20-1 


COMPLETE  ACCOUNTING  COURSE — PART  II 

Lecture  20 

INVESTMENTS;  DEFERRED  CHARGES 


Problem  43 

The  following  are  the  balance  sheets  on  December  31,  1918,  of  the  A  and  B 
Companies,  respectively: 


ASSETS 
Land  and  Buildings 
Machinery  and  Plant 
Sundry  Debtors 
Inventories 
Cash  in  Bank   and  on  Hand 


A  COMPANY 


$112,500.00 
163,295.00 
123,410.00 
193,200.00 
115,440.00 

$707,845.00 


LIABILITIES 
Capital  (100,000  shares  of 

$5  each,  fully  paid) 
Sundry  Creditors 
Reserve 
Surplus — Balance 


$500,000.00 
90,645.00 
35,000.00 
82,200.00 

$707,845.00 


B  COMPANY 


ASSETS 
Machinery  and  Plant,  Cost 
Sundry  Debtors 
Inventories 
Cash 
Surplus — Balance 


$111,200.00 

31,245.00 

47,115.00 

645.00 

11,145.00 

$201,350.00 


LIABILITIES 
Capital  (6,000  shares  at 

$25  each,  fully  paid) 
Sundry  Creditors 


$150,000.00 
51,350.00 


$201,350.00 


It  is  agreed  that  the  business  shall  be  consolidated  by  the  A  Company 
purchasing  the  B  Company  as  on  December  31,  1918,  on  the  following  basis: 

1.  Dividend  of  15%   to  the  shareholders  of  A  Company,  to  be  declared 

prior  to  the  consolidation. 

2.  The  A  Company  to  take  over  the  assets  of  the  B  Company,  the  con- 

sideration being: 

(a)  The  payment  of  the  liabilities  of  the  B  Company. 

(b)  The  payment  of  the  costs  of  consolidation. 

(c)  The  issue  to  the  shareholders  of  the  B  Company  of 

7  fully  paid  shares  of  $5  each  in  the  A  Company 
for  every  2  fully  paid  shares  in  the  B  Company. 


Copyright,  1919,  The  Ronald  Press  Company 


II-20-2 

The  cost  of  consolidation  amounted  to  |6,030.   The  machinery  and  plant 
and  the  floating  assets  of  the  A  Company  were  worth  the  values  stated  on  the 
balance  sheet. 

Draft  the  journal  entries  recording  the  purchase  in  the  books  of  the  A 
Company,  and  set  out  the  balance  sheet  of  the  A  Company  after  the  consolida- 
tion, assuming  no  cash  payments  have  been  made. 

Problem  44 

A  corporation  is  formed  January  1  with  a  nominal  capital  of  $5,000,000 
in  $50  shares.  There  is  a  first  issue  of  50,000  shares,  $2.50  per  share  being 
due  on  application;  $7.50,  making  $10,  due  on  allotment,  January  14;  $10  due 
on  February  1;  and  $10  due  on  April  1.   Balance  subject  to  call.  Applications 
were  received  for  44,652  shares,  and  43,822  were  allotted  on  January  14. 

Give  the  journal  entries  required  to  record  these  facts. 

Problem  45 

Under  the  laws  of  the  State  of  Maine,  certain  companies  were  taken  over 
by  a  newly  organized  corporation  which  bought  their  entire  assets  and  conducted 
the  business  for  several  months  before  it  was  discovered  that  the  inventories 
upon  which  the  transaction  was  first  based  were  overstated  to  the  extent  of 
$10,000  in  the  case  of  one  of  the  constituent  companies  by  reason  of  a  clerical 
error.   It  was  further  found  that  it  would  be  impracticable  to  recover  said 
$10,000,  or  any  portion  of  it,  from  any  of  the  original  companies,  or  from  any 
of  the  original  stockholders. 

The  balance  sheet  of  the  Maine  corporation,  prior  to  the  discovery  of  the 
error  in  inventory,  was  as  follows: 


ASSETS 


Plant 

Good-Will  and  Patents 

Cash 

Bills  Receivable 

Accounts  Receivable 

Inventories 


$268,137.00 

28,967.49 

5,638.35 

13,282.22 

117,203.88 

232,751.42 


$665,980.36 


LIABILITIES 


Capital  Stock 
Accounts  Payable 
Bills  Payable 
Surplus 


$500,000.00 
22,684.26 
102,000.00 
41,296.10  $665,980.36 


What  entries  would  the  bookkeeper  be  justified  in  making  to  adjust  the 
accounts?  Give  reasons  for  your  answer. 


Copyright,  1919,  The  Ronald  Press  Company 


II-20-3 

MISCELLANEOUS  QUESTIONS 

Question  111 — A  company  shows  among  its  assets  $2,675  as  unexpired  insur- 
ance on  January  1,  1918.   On  February  1,  1918,  the  plant  is  destroyed  by  fire 
and  a  total  loss  of  $57,875  occurs,  which  the  insurance  company  pays.  How 
would  you  treat  the  $2,675  unexpired  insurance  item? 

Question  112 — As  an  auditor,  how  would  you  undertake  to  satisfy  yourself 
in  regard  to  the  following  items  carried  on  the  balance  sheet  as  investments: 

(a)  First  mortgage  6%   bonds  of  the  Progressive  Manufacturing  Co.,  par 

value  $100,000,  cost  value  $99,000,  market  value  $96,000. 

(b)  Second  preferred  shares  in  the  New  Manufacturing  Co.,  value 

$155,000,  par  value  $175,000,  market  value  $160,000. 

Question  113 — How  would  you  verify  the  extensions  of  an  inventory  taken  by 
a  large  5  and  10  cent  store? 

Question  114 — Would  you  regard  the  following  items  as  proper  ones  to  carry 
forward  as  Deferred  Charges  at  December  31,  1918; 

(a)  Advertising  expenditures — spring  season  of  1919,  $8,311.83. 

(b)  Traveling  expenses  of  salesmen  in  disposing  of  goods  for  shipment 

in  that  season,  $41,073.24. 

(c)  Proportion  general  and  office  expenses  considered  to  have  been 

incurred  in  connection  with  securing  of  orders  for  delivery  in 
'      the  1919  season,  $11,045.27. 

Question  115 — How  should  the  following  items  be  valued  for  the  purposes  of 
a  balance  sheet : 

(a)  Investments  in  other  companies  held  as  marketable  investments. 

(b)  Investments  in  other  companies  held  as  permanent  investments. 
As  auditor,  how  would  you  satisfy  yourself  as  to  these  valuations? 


Copyright,  1919,  The  Ronald  Press  Company 


II-20-4 

Solution  to  Problem  39 


A  X  COMPANY 

STATEMENT  OF  APPLICATION  OF  FUNDS 

YEAR  ENDING  DECEMBER  31,  1917 


FUNDS  WERE  OBTAINED  FROM  THE  FOLLOWING  SOURCES: 
Sale  of  Common  Stock  (250  shares  at  par) 
Income  from  operations: 
Surplus  Net  Profits 

LESS — Book  Profit  on  increase  in 
land  valuation 


Increase  in  Reserves: 

Reserve  for  Depreciation 
Sinking  Fund  Reserve 

Reduction  of  Bond  Discount  Unamortized 

Total  Funds  Provided 


$52,700.00 
5,000.00 


$38,000.00 
10,000.00 


$  25,000.00 

47,700.00 

48,000.00 

1,000.00 

$121,700.00 


THE  FUNDS  OBTAINED  WERE  APPLIED  IN  THE  FOLLOWING  MANNER: 
Purchase  of  new  Machinery  and  Equipment 
Preferred  Stock  retired 
Dividends  paid 
Increase  in  Working  Capital  as  summarized  below 


$  35,000.00 

15,000.00 

8,100.00 

63,600.00 

$121,700.00 


SUMMARY  OF  CHANGES  IN  WORKING  CAPITAL 

PARTICULARS  1916  1917  INCREASE  DECREASE 

Inventories  $  88,000.00  $  65,500.00  $ $22,500.00 

Accounts  Receivable  104,000.00  86,000.00   18,000.00 

Investments  65,000.00  71,500.00  6,500.00   

Cash  2,500.00  18,100.00  15,600.00   

Prepaid  Expenses  5,000.00  4,000.00   1,000.00 

TOTAL  CURRENT  ASSETS  $264,500.00  $245,100.00  $22,100.00  $41,500.00 

LESS — Accounts  Payable  145,000.00  62,000.00  83,000.00 

WORKING  CAPITAL  $119,500.00  $183,100.00  $63,600.00 


Copyright,  1919,  The  Ronald  Press  Company 


Solution  to  Problem  40 


II-20-5 

Exhibit  A 


THE  WESTERN  MAIJUFACTURING  COMPANY 
BALANCE  SHEET,  DECEMBER  31,  1918 


ASSETS 


PLANT 

Less — Reserve  for  Depreciation 

CURRENT  ASSETS: 

Inventories  of: 
Raw  Material 
Work  in  Progress 
Finished  Stock 

Customers*  Accounts 

Less — Reserve  for  Bad  Debts 

Cash  in  Bank  and  on  Hand 

DEFERRED  CHARGES: 

Une3q>ired  Insurance 


;j400,000.00 

14,000.00  $386,000.00 


$10,000.00 
6,000.00 
28,575.00  $  44,575.00 


48,000.00 
720.00 


47.280.00 
11,500.00 


103,355.00 

1,200.00 
$490,555.00 


LIABILITIES 


CAPITAL  STOCK: 
Authorized 

Issued  and  Outstanding 
FIRST  MORTGAGE  Q%   GOLD  BONDS 

Issued  eind  Outstanding 
CURRENT  LIABILITIES: 

Accounts  Payable 

Accrued  Bond  Interest 

Accrued  Wages 

SURPLUS: 

Balance  at  January  1,  1918 
DEDUCT — Loss  for  year  ending  December 
31,  1918  (Exhibit  B) 


•Red. 


$400,000.00 

$350,000.00 

150,000.00 

$  35,000.00 
9,000.00 

500.00    44,500.00 


$  51,000.00 
104,945.00  *  53,945.00 


$490,555.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-20-6 


Exhibit  B 


THE  WESTERN  MANUFACTURING  COMPANY 

STATEMENT  OF  PROFITS  AND  INCOME 

FOR  YEAR  ENDING  DECEMBER  31,  1918 

(Number  of  tons  sold,  190,000) 


SALES  $228,000.00 

Less — Discount  on  Sales  7,000.00 


PER  TON 


NET  SALES  $221,000.00  $1,163 

COST  OF  SALES  (Exhibit  C)  237,925.00   1.253 


GROSS  LOSS  ON  SALES  $  16,925.00  $  .090 

DEDUCT — Miscellaneous  Income  4,700.00 


$  12,225.00 


ADD—SELLING  AND  GENERAL  EXPENSES: 

Salesmen's  Salaries  and  Expenses  $  21,000.00 

Bad  debts  720.00 

Office  Salaries  and  Expenses  62,000.00    83,720.00 


LOSS  FROM  OPERATIONS  $  95,945.00 

ADD — Bond  Interest  9,000.00 


TOTAL  LOSS  TRANSFERRED  TO  SURPLUS  (Exhibit  A)   $104,945.00 


Exhibit  C 
FINISHED  STOCK  ACCOUNT 

TONS  PER  TON   AMOUNT                  TONS  PER  TON  AMOUNT 

Inventory  at                         Sales        12,500  $1.00  $  12,500 

Jan.  1  12,500  $1.00  $  12,500  "  177,500  1.27  225,425 
Production                           Inventory  at 

(Exhibit  D)  200,000   1.27   254,000     Dec.  31      22,500   1.27  28,575 


212,500         $266,500  212,500         $266,500 


NOTE — Two  methods  of  ascertaining  the  cost  of  sales  are  in  general  use: 

1.  On  the  assumption  that  the  inventory  on  hand  at  January  1  is  sold 

first,  price  all  sales  up  to  that  amount  at  the  opening  inventory 
price. 

2.  Price  all  sales  at  average  cost  of  finished  stock  to  date  of  sale. 


Copyright,  1919,  The  Ronald  Press  Company 


II-20-7 
Exhibit  D 


THE  WESTERN  MANUFACTURING  CO. 
STATEMENT  OF  COST  OF  MANUFACTURE 
FOR  YEAR  ENDING  DECEMBER  31,  1918 

MATERIALS  USED: 

Inventory  of  Raw  Materials  at  January  1,  1918     $  40,000.00 
Materials  Purchased  less  returns  159,500.00 


$199,500.00 
DEDUCT — Inventory  at  December  31,  1918  10,000.00  $189,500.00 


PRODUCTIVE  LABOR  40,500.00 

FACTORY  EXPENSES: 

Heat,  Light,  and  Power  $  3,500.00 

Depreciation  4,000.00 

Miscellaneous  Factory  Expenses  12,500.00    20,000.00 


$250,000.00 


ADD — Variation  in  Work  in  Progress  Inventories: 

Inventory  at  January  1,  1918  $  10,000.00 

Inventory  at  December  31,  1918  6,000.00     4,000.00 


COST  OF  FINISHED  PRODUCT  MANUFACTURED  $254,000.00 


ANSWERS  TO  QUESTIONS 
Answer  to  Question  101 — 

1.  Obtain  a  copy  of  the  customers  ledger  trial  balance. 

2.  Check  the  balances  against  the  corresponding  ledger  accounts,  noting: 

a)  Whether  the  balance  is  apparently  correct.  This  is  done  by  scanning 

the  debits  £ind  credits  without  formally  footing  them. 

b)  Whether  the  balance  represents  certain  specific  invoices  or  is 

the  net  balance  of  a  number  of  debits  and  credits. 

c)  Whether  the  balance  represents  current  invoices,  £in  old  balance 

carried  forward,  unpaid  notes,  drafts,  or  checks  charged  back, 
etc. 

d)  Whether  the  balance  as  of  the  closing  date  has  since  been  liquidated 

in  cash,  returns,  allowances,  etc. 

3.  Foot  the  trial  balance  to  see  whether  the  total  of  the  customers  ledger 
trial  balance  is  in  agreement  with  the  general  ledger  controlling  account.   If 
there  be  no  controlling  account,  it  is  advisable  to  construct  one  wherever 
possible.  Whenever  possible,  verify  the  balance  through  communication  with 

Copyright,  1919,  The  Ronald  Press  Company 


II-20-8 

the  customer.  If  this  be  done,  great  care  must  be  exercised  in  order  that  the 
balance  of  the  statement  sent  to  the  customer  is  not  altered  after  the  auditor 
has  compared  same  with  the  ledger  account,  and  that  all  replies  are  received  by 
the  auditor  in  such  manner  that  they  could  not  be  altered  or  withheld.  The 
procedure  generally  preferred  is  as  follows: 

a)  Statement  prepared  by  bookkeeper  in  usual  way. 

b)  Statement  compared  with  ledger  account  by  auditor. 

c)  Rubber  stamped  with  request  to  examine  the  statement  and  notify 

auditor  whether  it  is  correct,  or  if  desired  whether  it  is  not 
correct. 

d)  Statement  mailed  by  auditor  in  envelope  bearing  auditor's  return 

address. 

e)  Reply  received  and  carefully  examined. 

f )  Second  and  third  request  made  when  considered  advisable. 

4.  In  order  to  ascertain  the  sufficiency  of  the  reserve  for  bad  and  doubtful 

accounts  classify  all  overdue  balances  as  follows: 

OVER 

PAGE     NAME     AMOUNT     30  DAYS    60  DAYS    90  DAYS    90  DAYS 

Take  up  these  accounts  with  the  credit  man  or  official  in  charge  of  collections. 
Supplement  the  information  obtained  from  him  by  an  examination  of  the  correspond- 
ence with  these  customers. 

Answer  to  Question  102 — A  list  of  the  outstanding  accounts  which  each  col- 
lector is  to  collect  must  be  prepared  in  the  office,  and  receipts  in  duplicate 
should  be  written  out  in  the  office  and  handed  to  the  collector  in  respect  of 
these  amounts. 

At  the  end  of  each  week  or  other  period  the  collector  will  then  either  have 
to  account  for  cash  or  produce  the  receipts  in  respect  of  those  items  which  he 
has  not  yet  collected. 

The  collectors  in  the  various  districts  should  be  changed  about  frequently. 

Answer  to  Question  105 — All  charges  other  than  sales  should  be  verified  to 
ascertain: 

1.  The  character  of  such  charges. 

2.  Whether  they  were  properly  authorized. 

Where  such  debits  are  few  in  number  a  complete  check  may  be  made  readily. 
Where  the  number  involved  will  not  permit  of  a  complete  verification,  a  test  is 
generally  resorted  to. 

Answer  to  Question  104— The  only  satisfactory  verification  of  the  balances 
in  an  officer's  account  is  to  obtain  the  written  approval  of  that  officer. 
Oftentimes  an  analysis  of  the  account  would  be  presented  for  his  perusal. 

Answer  to  Question  105 — 

(a)  In  the  case  of  an  agricultural  implement  manufacturer  practically  all 
customers*  accounts  would  be  represented  by  notes.  Notes  on  hand  should  be 

Copyright,  1919,  The  Ronald  Press  Company 


II-20-9 

examined  and  the  total  compared  with  the  general  ledger  account.  In  case 
notes  are  out  for  collection  or  in  litigation  they  should  be  verified  by  corre- 
spondence with  the  party  holding  same  at  the  date  of  the  audit.  Notes  paid  be- 
tween the  closing  date  and  the  date  of  audit  are  verified  by  examination  of  the 
cash  receipts  book.   Overdue  notes  should  be  classified  in  the  same  manner  as 
overdue  accounts  receivable.  In  determining  the  adequacy  of  the  reserve  for 
bad  and  doubtful  notes  it  should  be  noted  that  in  the  implement  business  the 
fact  that  a  note  is  long  overdue  is  not  in  itself  evidence  of  non-collectibility« 
Oftentimes  the  accrued  interest  is  not  taken  up.  In  such  cases  it  may  be  con- 
sidered an  offset  to  the  collection  expenses  not  reserved  for. 

(b)  In  the  case  of  a  retail  department  store  the  notes  on  hand  would  be  veri- 
fied in  the  manner  outlined  above.  In  determining  the  adequacy  of  the  reserve 
for  bad  and  doubtful  notes  it  should  be  noted  that  in  the  department  store 
business  notes  receivable  are  a  sign  of  financial  weakness  and  overdue  notes 
are  generally  doubtful  of  collection. 

REFERENCES: 

Montgomery,  pages  99-103;  128-133 
Wildman,  pages  43-47;  142-147 


Copyright,  1919,  The  Ronald  Press  Company 


11-20-11 


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Copyright,  1919,  The  Ronald  Press  Company 


II-21-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 

Lecture  21 

FIXED  ASSETS 


Problem  46 

The  Smith  Manufacturing  Co.  with  $1,000,000  capital  stock,  the  Young  Manu- 
facturing Co,  with  $500,000  capital  stock,  and  the  Star  Manirfacturing  Co,  with 
$400,000  capital  stock,  agree  to  consolidate  as  the  Universal  Manufacturing 
Corporation,  the  new  comp£iny  to  buy  all  the  properties  of  the  old  companies,  at 
a  valuation  to  be  fixed  by  appraisal,  payment  therefor  to  be  made  in  full-paid 
stock  of  the  new  company,  the  old  companies  to  pay  off  their  own  indebtedness. 

The  appraised  values  of  the  old  companies  are  as  follows: 


REAL  ESTATE 

BILLS 

HORSES 

OFFICE 

AND 

PLANT 

CASH 

RECEIV- 

WAGONS, & 

FURNI- 

TOTAL 

BUILDINGS 

ABLE 

HARNESS 

TURE 

Smith   $680,000 

$390,000 

$15,000 

$10,000 

$4,000 

$1,000 

$1,100,000 

Young    327,000 

160,000 

3,000 

6,000 

3,000 

1,000 

500,000 

Star     126,000 

71,000 

1.000 

1,500 

500 

200,000 

The  appraised  value 

$1,800,000 

On  this  valuation  the  Universal  Manufacturing  Corporation  issued  $2,000,000 
of  stock,  shares  $100  each,  which  was  divided  pro  rata  among  the  old  companies 
on  the  basis  of  their  appraised  value,  no  fractional  shares  of  stock  to  be 
issued,  odd  amounts  to  be  paid  old  companies  in  cash. 

Give  journal  entries  necessary  to  set  up  property  accounts  and  credit  old 
companies  with  their  pro  rata  on  the  books  of  the  new  company. 

At  the  time  of  the  consolidation  the  ledger  accounts  of  the  Star  Manufactur- 
ing Co.  were  as  follows: 


Real  Estate  and  Buildings 

Plant 

Cash 

Horses,  Wagons,  and  Harness 

Office  Furniture 


$250,000,00 

247,000.00 

1,000.00 

1,800.00 

1,200.00 

$501,000.00 


Capital  Stock 
Bills  Payable 
Accounts  Payable 


$400,000.00 
50,000.00 
51,000.00 


$501,000.00 


Make  proper  Journal  entries  to  liquidate  in  stock  of  the  new  company  the 
liabilities  other  than  capital  stock,  to  apportion  the  remaining  stock  and  cash» 
and  to  close  the  books  of  the  Star  Manufacturing  Co, 


Copyright,  1919,  The  Ronald  Press  Company 


II-21-2 


Problem  47 

Charles  and  Robert  Wilson  are  copartners  in  a  manufacturing  business, 
trading  under  the  firm  name  of  Wilson  Bros.   Following  is  a  statement  of  the 
firm's  financial  condition  December  31,  1918: 


Real  Estate  and  Buildings  $165,000.00  Notes  Payable 


Machinery  and  Fixtures 

Horses,  Trucks,  and  Harness 

Patents 

Stocks  and  Materials 

Notes  and  Loans  Receivable 

Accounts  Receivable 


39,000.00 
4,500.00 
1,500.00 

20,000.00 
5,000.00 

15,000.00 

$250,000.00 


Accounts  Payable 
Charles  Wilson — Capital 
Robert  Wilson — Capital 


;  6,000.00 
34,000.00 

150,000.00 
60,000.00 


$250,000.00 


A  company  under  the  corporate  title  of  Wilson  &  Wilson,  Incorporated,  is 
organized  with  a  capital  stock  of  $300,000,  of  which  $60,000  is  cumulative 
preferred  stock  and  $240,000  common  stock  (both  $100  par  value),  to  acquire  and 
conduct  the  business  of  Wilson  Bros.   Charles  and  Robert  Wilson  and  Henry 
Miller  each  subscribe  for  $10,000  of  common  stock.   The  company  votes  to  acquire 
the  interest  of  Charles  and  Robert  Wilson  in  the  business,  real  estate,  plant, 
outstanding  accounts,  etc.,  of  Wilson  Bros,  and  to  assume  the  firm's  indebted- 
ness of  $40,000  in  consideration  of  the  sum  of  $210,000  and  to  pay  therefor 
2,100  shares  of  the  common  stock  of  the  corporation,  1,500  shares  to  be  issued 
in  the  name  of  Charles  Wilson  and  600  shares  in  the  name  of  Robert  Wilson. 
The  company  votes  to  place  a  mortgage  on  its  real  estate  and  plant  for 
$50,000  to  secure  an  issue  of  $50,000  first  mortgage  5%  gold  bonds  of  the 
denomination  of  $1,000  each.   The  creditors  subscribe  for  preferred  stock  to 
the  amount  of  50%  of  the  amounts  due  them  and  take  bonds  at  par  for  the 
remainder. 

Make  all  entries  for  the  foregoing  transactions  in  the  order  of  their  oc- 
currence, giving  the  details  to  be  found  in  ledgers  and  all  subsidiary  books 
of  account  and  record. 


QUESTIONS  ON  AUDITING 

Question  116— Outline  the  procedure  you  would  adopt  in  the  verification  of 
goods  purporting  to  be  out  on  consignment. 

Question  117 — You  are  auditing  the  balance  sheet  of  a  finance  company  made 
up  to  August  31.  You  find  that  $25,000  Mill  of  San  Francisco  stock  was  sold 
on  the  previous  29th  of  August,  and  as  evidences  of  this  you  are  shown  a 
broker's  contract  of  that  date,  which  discloses  that  the  stock  is  sold  for 
delivery  on  the  15th  of  September  following.   In  the  balance  sheet  the  broker 
is  included  among  sundry  debtors  for  the  amount  of  the  contract.   Is  this 
right?  State  your  reasons  and  say  how  you  would  verify  the  asset. 


Copyright,  19l9,  The  Ronald  Press  Company 


I 1-21-3 

Question  118~A  company,  of  which  you  are  the  auditor,  makes  an  issue  of 
shares  for  the  purpose  of  providing  money  to  build  a  factory  and  equip  it  with 
plant  and  machinery,  and  proposes  to  pay  interest  on  such  shares  out  of 
capital,  at  the  rate  of  5%  per  annum,  during  the  construction  of  the  factory. 
Write  a  letter  to  the  directors,  giving  them  your  views. 

Question  119 — In  the  audit  of  a  wholesale  coal  company  you  find  that  coal 
in  transit  has  not  been  included  in  the  inventory  which  is  listed  on  the 
balance  sheet.  As  an  auditor  engaged  to  certify  to  the  foregoing  balance  sheet 
what  attitude  would  you  take  in  respect  to  an  item  of  that  character? 

In  case  you  suspected  that  the  coal  stated  to  be  "in  transit"  was  actually 
on  hand,  how  would  you  proceed  to  ascertain  the  facts  as  to  whether  or  not  such 
coal  was  on  hand  at  the  date  of  the  balance  sheet? 

Question  120 — As  auditor,  to  what  extent  would  you  hold  yourself  re- 
sponsible for  the  inventory  of  a  retail  department  store  with  gross  sales  of 
$2,500,000  annually? 


Solution  to  Problem  41 


FOUNDRY  DEPARTMENT 
COST  OF  PRODUCTION  FOR  MONTH  OF  MARCH 

(Number  of  pounds  produced,  1,200,000) 


Materials  Used 
Productive  Labor 
General  Foundry  Expenses 


AMOUNT 
339,083.27 
38,092.78 
19,027.83 


PER  LB. 


$96,203.88  $0.0801699 


(1) 
Work  in  Progress 

To — Foundry  Department  Account 
For  cost  of  castings  produced  during 
the  month  of  April  under  the  following 
orders: 


$82,334.49 


$82,334.49 


ORDER  NO. 

LBS.  OF  CASTINGS 

AMOUNT* 

196 

304,000 

$24,371.65 

198 

100,000 

8,016.99 

203 

98,000 

7,856.65 

206 

350,000 

28,059.47 

209 

175,000 

14,029.73 

1,027,000 

$82,334.49 

*Average  per  pound,  $0.0801699. 

Copyright,  1919,  The  Ronald  Press  Company 


II-21-4 


(2) 
Work  in  Progress 

To — General  Stores  Department 
Value  of  materials  issued  during  the 
month  of  April  by  the  general  stores 
department  against  the  following  orders: 
ORDER  NO.  AMOUNT 

196  $11,088.12 

198  9,001.33 

201  12,081.32 

207  11,091.33 

208  31,083.27 
212  13,827.23 
215  9,038.11 


$97,210.71 


$97,210.71 


$97,210.71 


(3) 
Work  in  Progress 

To — Wages  Payable 
Distribution  of  productive  labor  during  the 
month  of  April: 


ORDER  NO. 
196 
198 
201 
207 
208 
212 
215 


HOURS 

11,000 

10,000 

13,000 

14,000 

52,000 

16,000 

10,500 

126,500 


AMOUNT 
$  4,608.07 
3,812.08 
5,708.91 
6,103.27 
18,081.33 
6,308.02 
4,108.27 


,729.95 


48,729.95 


48,729.95 


(4) 
Work  in  Progress 

To — General  Factory  Expense  Account 
Distribution  of  general  factory  expenses 

against  the  various  orders  month  of  April: 

ORDER  NO.   MACHINE  HOURS  AMOUNT* 

196          11,000  $  3,311.58 

198          10,000  3,010.52 

201         13,000  3,913.68 

207  14,000  4,214.73 

208  52,000  15,654.72 
212  16,000  4,816.83 
215         10,500  3,161.05 


126,500 


,083.11 


38,083.11 


38,083.11 


*Rate  per  hour,  $0.30105225. 

Copyright,  1919,  The  Ronald  Press  Company 


II-21-5 


(5) 
Cost  of  Goods  Sold  Account  $109,309.54 

To — Work  in  Progress  Account 
Cost  of  orders  completed  and  shipped  during 
the  month  of  April: 

GENERAL   PRODUCTIVE    PROP'N 


$109,309.54 


ORDER 

NO. 

CASTINGS 

STORES 

LABOR 

FACT'Y  EXP. 

TOTAL 

196 

$24,371.65 

$11,088.12 

$4,608.07 

$3,311.58 

$43,379.42 

198 

8,016.99 

9,001.33 

3,812.08 

3,010.52 

23,840.92 

206 

28,059.47 

28,059.47 

209 

14,029.73 





14,029.73 

$74,477.84  $20,089.45  $8,420.15    $6,322.10   $109,309.54 


(6) 
Customers'  Accounts  111,000.00 

To — Sales  Accounts 
The  following  orders  were  shipped  during 
the  month  of  April: 

ORDER  NO.  CONTRACT  PRICE 

196  $  35,000.00 

198  21,000.00 

206  35,000.00 

209  20,000.00 


$111,000.00 


STATEMENT  OF  GROSS  PROFITS  ON  CONTRACTS 
SHIPPED  DURING  THE  MONTH  OF  APRIL 


111,000.00 


ORDER  NO. 
196 
198 
206 
209 


CONTRACT 
PRICE 
I  35,000.00 
21,000.00 
35,000.00 
20.000.00 

$111,000.00 


COST 

$  43,379.42 

23,840.92 

28,059.47 

14,029.73 

$109,309.54 


GROSS 

PROFIT  or  LOSS* 

*$8,379.42 

*  2,840.92 

6,940.53 

5,970.27 


$1,690.46 


Copyright,  1919.  The  Ronald  Press  Company 


II-21-6 

Solution  to  Problem  42 


Exhibit  I 


JOHN  ANSON  COMPANY 
BALANCE  SHEET,  JULY  31,  1919 


ASSETS 
CURRENT  ASSETS: 
Cash 
Accounts  Receivable  (Less — Reserve  for 

Discounts  $275) 
Merchandise  on  Hand 

PREPAID  INSURANCE 
FURNITURE  AND  FIXTURES 

LESS — Reserve  for  Depreciation 


$10,870.30 

15,518.94 
5,473.82  $31,863.06 


$  3,745.00 
2,500.00 


956.83 


1,245.00 
$34,064.89 


LIABILITIES 
CURRENT  LIABILITIES: 

Accounts  Payable  for: 
Cartage 
Freight 

General  Expense 
Accrued  Taxes 

Sales  on  Consignments  not  closed  out  (Less- 
Freight  $190.55,  Cartage  $13.43,  Drafts 
$1,248.51,  and  Commissions  $2,111.16) 

NET  WORTH: 

Capital  Stock 

Surplus — Balance  June  30,  1919 
Profits  for  July  (including  gross  profit  of 
$2,111.16  on  consignments  partially  sold) 


$    37.60 

14.82 

44.66 

256.90 


13,411.77  $13,765.75 


$10,000.00 
7,774.82 


2,524.32   20,299.14 


$34,064.89 


Copyright,  1919,  The  Ronald  Press  Company 


II-21-7 
Exhibit  II 


JOHN  ANSON  COMPANY 

STATK\tENT  OF  PROFIT  AND  LOSS 

FOR  MONTH  ENDING  JULY  31,  1919 


SALES 

Deduct — Cost  of  Goods  Sold: 

Inventory  July  1,  1919 
Purchases 


Less — Inventory  July  31,  1919 

GROSS  PROFITS  ON  SALES 
ADD — Commissions  from  Consignments  (Out  of  Sales 
totaling  $33,034.78) 


LESS — Discounts  Allowed  Customers 

GROSS  PROFITS  FROM  OPERATIONS 
DEDUCT— SELLING  AND  GENERAL  EXPENSES : 
Clerk's  Salaries 
Office  Salaries 
Rent 

Postage  and  Stationery 
Insurance 
General  Expenses 
Taxes 
Depreciation  on  Furniture 

NET  PROFIT  FROM  OPERATIONS 
ADD— Miscellaneous  Income— Interest  on  Bank  Balance 

SURPLUS  NET  PROFIT  FOR  JULY,  1919 


$5,649.31 

%   4.545,67 

5,463.81 

$10,009.48 

5,473.82 

4,535.66 

$1,113.65 

3,556.54 

$4,670.19 

893.50 

$3,776.69 

%   475.00 

330.00 

125.00 

53.67 

42.78 

100.81 

35.16 

100.00 

1,262.42 

$2,514.27 

10.05 

$2,524.32 

ANSWERS  TO  QUESTIONS 


Answer  to  Question  106 — 


1.  Obtain  the  original  inventory  sheets. 

2.  Compare  the  quantities  with  the  stores  records  if  such  records  are 

kept. 

3.  Compare  the  prices  with  the  latest  invoices  and  market  quotations. 

4.  Test  the  extensions. 

5.  Prove  the  footings. 

6.  Selecting  certain  important  items,  set  up  a  comparative  inventory 

sheet  as  follows s 

DECEMBER  31,  1917  DECEMBER  31,  1918 

ZTBI    QUANTITY  PRICE  AMOUNT    QUANTITY  PRICE  AMOUNT 


Copyright,  1919,  The  Ronald  Press  Comp.my 


II-21-8 

7.  Note  the  trend  of  the  quantities, 

8.  Note  whether  the  inventory  sheets  bear  the  initials  of  parties  tak- 

ing, pricing,  extending,  and  footing  same. 

9.  Obtain  certificate  from  one  or  more  officials  as  to  the  correctness 

of  the  inventory  as  a  whole. 

10.  Ascertain  whether  there  are  any  obsolete  or  other  imusable  materials 

listed  in  the  inventory, 

11.  Are  all  goods  received  up  to  the  balance  sheet  date  included? 

12.  Ascertain  whether  goods  received  on  consignment  are  listed  as  goods 

owned. 

13.  Ascertain  whether  goods  shipped  on  consignment  are  included  in  the 

inventory. 

Answer  to  Question  107 — Ordinarily,  it  is  not  permissible  to  take  up 
profits  on  uncompleted  work.  The  only  exception  would  arise  in  the  case  of  con- 
tracts requiring  a  very  long  period  for  completion.  If  such  contracts  were  un- 
dertaken by  a  steel  products  manufacturing  company  they  could  be  subdivided  into 
sections  and  the  profit  and  loss  determined  separately  on  each.  If  the  contract 
covered  th-e  production  of  a  large  quantity  of  items  of  the  same  general  character, 
it  would  be  proper  to  take  up  the  profit  on  each  lot  when  shipped. 

Answer  to  Question  108 — 

1.  Obtain  the  original  inventory  sheets. 

2.  Compare  the  quantities  with  the  stock  records  if  such  records  are  kept. 

3.  Compare  the  prices  with  the  cost  records  upon  which  they  are  based. 

Analyse  the  cost  system  in  use  in  order  to  ascertain  whether  the 
costs  obtained  through  the  operation  of  that  system  are  approxi- 
mately correct. 

4.  In  case  no  cost  system  is  in  use,  ascertain  the  basis  upon  which  the 

prices  were  determined,  and  ascertain  whether  that  basis  is  ap- 
proximately correct, 

5.  Test  the  extensions. 

6.  Prove  the  footings, 

7.  Selecting  certain  important  items,  set  up  a  comparative  inventory 

sheet  as  follows: 

DECEMBER  31,  1917  DECEMBER  31,  1918 

ITEM    QUANTITY    PRICE    AMOUNT    QUANTITY    PRICE    AMOUNT 

8.  In  case  process  costs  can  be  obtained,  compare  the  per  unit  cost  of 

each  production  expense  with  the  corresponding  item  in  previous 
years, 

9.  In  case  test  costs  are  used,  ascertain  the  manner  in  which  such  test 

costs  were  obtained  and  the  procedure  used  to  verify  the  correctness 
of  such  test  costs. 

10.  Note  the  trend  of  the  quantities,  especially  in  relation  to  volume 

of  sales. 

11.  Inquire  as  to  obsolete  or  other  unsalable  stock,  especially  the 

prices  used. 

12.  Note  whether  the  inventory  sheets  bear  the  initials  of  parties  taking, 

pricing,  extending,  and  footing  same. 

Copyright,  1919,  The  Ronald  Press  Company 


II-21-9 

13»  Obtain  certificate  from  one  or  more  officials  as  to  the  correctness 
of  the  inventory  as  a  whole. 

14.  Ascertain  whether  all  goods  shipped  up  to  inventory  date  have  been 

excluded  from  the  inventory  sheets, 

15.  Ascertain  whether  the  selling  prices  less  estimated  selling  expense 

is  above  the  inventory  price. 

Answer  to  Question  109 — In  the  case  of  a  bicycle  inventory,  the  auditor  would 
be  justified  in  relying  upon  the  cost  records  for  inventory  cost  prices  in  case: 

1.  The  cost  system  is  based  on  correct  principles. 

2.  The  costs  are  being  properly  compiled. 

3.  Nothing  arises  during  the  course  of  the  audit  to  cast  doubt  on  the 

reliability  of  the  cost  records. 

Answer  to  Question  110 — 

(a)  The  gross  profit  test  refers  to  a  comparison  of  the  percentage  of  gross 
profit  to  net  sales  from  year  to  year.   These  percentages  are  readily  calculated 
from  the  periodical  statements  of  profits  and  income. 

(b)  The  comparative  inventory  test  refers  to  a  comparison  of  the  quantities 
€Uid  unit  prices  of  certain  items  selected  from  two  or  more  periodical  inven- 
tories. See  Answer  to  Question  106  (6). 

REFERENCES! 

Montgomery,  pages  104-120 
Wildman,  pages  130-134 


Copyright,  1919,  The  Ronald  Press  Company 


11-21-11 


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Copyright,  1919,  The  Ronald  Press  Company 


II-22-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
♦     Lecture  22 

INTANGIBLE  ASSETS 


Problem  48 

The  following  trial  balance  was  abstracted  from  the  general  ledger  of  the 
Vfhite  Manufacturing  Co.  as  of  December  31,  1918. 


ACCOUNT  . 
Capital  Stock 
Surplus 
Real  Estate 
Buildings 

Machinery  and  Equipment 
Notes  Receivable 
Customers*  Accounts 
Notes  Payable 
Accounts  Payable 

Inventory  of  Raw  Materials  at  January  1,  1918 
Purchases  of  Raw  Materials 
Wages 

Light,  Heat,  and  Power 
Sales 

Discounts  on  Sales 
Discounts  on  Purchases 
Freight-Inward 
Allowances  on  Sales 
Factory  Expenses 
Superintendent's  Salary 
Bad  Debts 

Officers'  Salaries 
Salesmen's  Salaries  and  Commissions 
Freight  Outward 
Salesmen's  Traveling  Expenses 
Cash 

Inventory  of  Finished  Product  at  January  1,  1918 
Repair  and  Maintenance  Charges 
Interest  Received 
Interest  Paid 
Insurance 


DEBITS 


$24,000.00 
36,783.11 
87,105.99 
21,678.03 
96,798.93 


38,983.45 

293,839.18 

160,511.92 

2,908.38 

19,419.87 

18,067.50 

13,081.14 

6,093.17 

3,000.00 

1,314.13 

12,000.00 

11,425.50 

10,439.23 

6,638.19 

10,751.02 

80,303.93 

22,037.73 

4,783.50 
1,403.98 


CREDITS 
$200,000.00 
69,304.48 


45,000.00 
39,632.95 


620,033.89 
6,487.11 


2,909.45 


$983,367.88  $983,367.88 


Copyright,  1919,  The  Ronald  Press  Company 


I 1-22-2 

Prepare  a  balance  sheet  at  December  31,  1918,  with  relative  statement  of 
profits  and  income.  Set  out  your  statements  in  the  best  possible  form  irrespec- 
tive of  the  number  of  accounts  involved. 

The  following  items  have  not  been  taken  into  consideration, 

1.  Inventory  of :  (a)  raw  materials,  $69,075,23;  (b)  in  process  of  manu- 

facture, 114,908.17;  (c)  finished  product,  |27,575.50. 

2.  Insurance  unexpired,  $593.44. 

3.  Dividend  of  3%  on  the  capital  stock  outstanding  payable  to  the  stock- 

holders of  record  December  31,  1918.  The  dividend  was  declared 
by  the  board  of  directors  at  a  meeting  held  on  December  27,  1918, 
and  is  payable  on  January  15,  1919. 

Problem  49 

A  died  on  June  1,  1918,  and  his  estate  consisted  of  the  following: 

Cash  on  Hand  %         350.00 

Cash  in  Bank  3,137.11 

First  Mortgage  6%  W  Ry,  Co.  Bonds  (Interest  Payable  April  1  and 

October  1)  75,000,00 

6%  Mortgage  Loans  (Interest  Payable  March  1  and  September  1)         40,000.00 

Preferred  Stock  (at  par)  in  the  Allen  Manufacturing  Co.  125,000.00 

Notes  Receivable  (Interest  at  5%  paid  to  May  1,  1918)  30,000.00 

Household  Furniture  1,000.00 

Sundry  Liabilities  12,000,00 

The  household  furniture  was  given  to  his  wife  and  she  is  entitled  to  the 
income  from  the  estate  for  life. 

The  following  legacies  were  mentioned  in  the  will:  (1)  William  Brown, 
|3,000;  (2)  John  Smith,  $2,000;  (3)  A.  R.  Jones,  $1,000. 

Funeral  expenses  amounted  to  $1,200;  probate  court  costs  $1,500;  attorney's 
and  accountant's  fees  $1,200.   The  preferred  stock  was  sold  for  $130,000. 

On  August  1,  1918,  the  debts  were  paid,  and  on  August  15,  1918,  the  legacies. 

The  income  from  the  investments  was  received  as  and  when  due,  and  the  income 
collected  to  October  31,  1918,  was  paid  to  the  widow  on  that  day. 

Prepare : 

(a)  The  necessary  opening  entries  for  the  executors 

(b)  Write  up  the  books  for  the  period  ending  October  31,  1918 

(c)  Statement  of  charge  and  discharge 

In  what  respects  (if  any)  would  the  foregoing  exhibits  be  altered  if  the 
widow  died  October  31,  1918? 


Copyright,  1919,  The  Ronald  Press  Company 


II-22-3 

MISCELLANEOUS  QUESTIONS 

Question  121 — A  died,  leaving  an  estate  consisting  of: 

Real  estate,  valued  at  $  30,000,00 

Share  in  partnership,  estimated  at  175,000.00 

Shares  of  stock  75,000.00 

Household  furniture  19,500.00 

Cash  at  bankers  4,000.00 

The  will  provided  for  an  annuity  of  $1,000  payable  to  testator's  wife  out 
of  income,  the  remainder  of  the  income  being  divisible  among  his  six  children 
equally  so  long  as  they  live  and  until  the  youngest  attained  the  age  of  21  years. 

What  books  and  accounts  would  you  open  for  the  executors,  and  what  informa- 
tion would  you  require  to  enable  you  to  write  them  up  and  adjust  the  capital  and 
income? 

Question  122 — At  November  30,  1918,  you  are  called  upon  to  audit  the  accounts 
of  the  estate  of  Glenn  Richards,  for  the  eleven  months  ending  that  date.  How 
would  you  satisfy  yourself  as  to  the  accuracy  of  the  opening  journal  entry  as 
shown  by  the  books? 

Question  125 — Under  the  last  will  and  testament  of  Henry  Rogers  all  the  in- 
come from  his  estate  consisting  of  farm  land,  stocks  and  bonds,  etc.,  is  payable 
to  the  widow  during  her  lifetime.  After  her  death,  the  entire  residuary  estate 
is  to  be  a  gift  to  the  Memorial  Hospital.  The  income  derived  from  the  estate  is 
the  widow's  sole  means  of  support.  Draft  the  form  of  cash  book  to  be  kept  by  the 
trustee. 

Question  124 — Referring  to  Question  123,  assume  Henry  Rogers  died  on  March 
15.   How  would  you  apportion  as  between  principal  and  income: 

(a)  Interest  from  bonds 

(b)  Dividends  from  stocks 

(c)  Rents  from  farm  land 

Question  125 — Referring  to  Question  123  and  124,  assume  the  widow  of  Henry 
Rogers  died  on  the  following  April  15,  before  any  moneys  had  been  received  in 
respect  of  rents,  interest,  or  dividends.  Would  the  entire  estate  at  April  15 
pass  to  the  remainderman  (the  Memorial  Hospital),  or  would  some  apportionment 
as  between  the  life  tenant  (widow  of  Henry  Rogers)  and  remainderman  be  called 
for? 

Give  full  reasons  for  your  answer.   If  in  your  opinion  an  apportionment 
is  called  for,  outline  the  procedure  required  to  make  such  £ui  apportionment. 


Copyright,  1919,  The  Ronald  Press  Company 


II-22-4 

« 

Solution  to  Problem  43 

JOURNAL  ENTRIES 

(1) 
Surplus  $  75,000.00 

To — Dividend  Payable  $  75, 000*00 

Dividend  of  15%  declared  by  the  board  of 
directors  as  of  December  31,  1918* 

(2) 
Unissued  Stock  105,000.00 

To — Capital  Stock  105,000.00 

To  record  increase  in  capital  stock  author- 
ized by  resolution  adopted  at  stockholders* 

meeting  held  on See  minute 

book,  page..,.,. 

(3) 

Machinery  and  Plant  111,200.00 

Sundry  Debtors  31,245.00 

Inventories  47,115.00 

Cash  645.00 

To — B  Co.  Vendor  Account  156,350.00 

Capital  Surplus  33,855.00 

To  record  purchase  of  assets  from  B  Co.,  per 

agreement  dated.  • and  per 

resolutions  adopted  by  directors  at  a 

meeting  held  on ;  A  Co«  to 

pay  liabilities  of  B  Co.  and  to  issue  7 
shares  of  preferred  stock  (par  value  $5 
each)  for  every  2  shares  (par  value  $25 
each)  turned  in  by  the  B  Co.  stockholders. 

(4) 
B  Co.  Vendor  Account  51,350.00 

To — Sundry  Creditors  .51,350.00 

To  record  the  assumption  of  the  outstanding 
liabilities  of  B  Co.  in  accordance  with  the 
agreement  dated 

(5) 
Consolidation  Expenses  6,030.00 

To — Accounts  Payable  6,030.00 

Expenses  incurred  in  connection  with  the 
consolidation. 

(6) 

Capital  Surplus  6,030.00 

To — Consolidation  Expenses  6,030.00 

To  write  off  the  consolidation  expenses. 

Copyright,  1919,  The  Ronald  Press  Company 


I 1-22-5 


(7) 
B  Co.  Vendor  Account  $105,000.00 

To — Unissued  Stock 
To  record  the  issue  of  21,000  shares  of  capi- 
tal stock  (par  value  %5   each)  to  share- 
holders of  B  Co,  in  full  payment  for  assets 
turned  over,  in  accordance  with  the 
agreement  and  resolution  referred  to  in 
entry  No,  3. 


$105,000.00 


A  COMPANY 
BALANCE  SHEET,  DECEMBER  31,  1918 


ASSETS 


CAPITAL  ASSETS: 

Land  and  Buildings 
Machinery  and  Plant 

CURRENT  ASSETS: 
Inventories 
Sundry  Debtors 
Cash  on  Hand  and  in  Bank 


$112,500.00 
274,495.00  $386,995.00 


$240,315.00 
154,655.00 
116,085.00   511,055.00 


$898,050.00 


LIABILITIES 

CAPITAL  STOCK  ISSUED  AND  OUTSTANDING 

CAPITAL  SURPLUS  (representing  excess  of  value  of  the 
sundry  assets  acquired  from  B  Co.  over  the  par 
value  of  the  stock  issued  in  payment  therefor) 
DEDUCT— Consolidation  Expenses 

CURRENT  LIABILITIES: 
Sundry  Creditors 
Accounts  Payable  in  respect  of  Consolidation 

Expenses 
Dividend  Payable 

RESERVE 

SURPLUS  ACCOUNT: 

Balance  at  .......... 

DEDUCT — Dividends  Declared 


$  33,855.00 
6,030.00 


$141,995.00 

6,030.00 
75,000.00 


$  82,200.00 
75,000.00 


$605,000.00 


27,825.00 


223,025.00 
35,000.00 

7,200.00 
$898,050.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-22-6 

Solution  to  Problem  44 

JOURNAL  ENTRIES 

(1) 
Unissued  Stock  $2,767,400.00 

Application  and  Allotment  2,232,600.00 

To — Authorized  Issue  Capital  Stock  15,000,000.00 
To  record  the  authorized  issue  of  cap- 
ital stock  per  minutes  of  stock- 
holders' meeting  held  on 

and  certificate  issued  by  the  Sec- 
retary of  State  under  date  of 

(2) 
Cash  111,630.00 

To — Application  and  Allotment 

Account  111,630.00 

Application  for  44,652  shares,  $2.50 
per  share  received  in  cash. 

(3) 
First  Call  Account  328,665.00 

To — Application  and  Allotment . 

Account  328,665.00 

First  call  of  $7.50  per  share  on  43,822 
shares  allotted. 

(4) 
Cash  328,665.00 

To — First  Call  Account  328, 665*. 00 

Cash  received  on  first  call. 

(5) 
Application  and  Allotment  Account  2,075.00 

To — Cash  2,075.00 

Return  of  payment  on  application  of 
$2.50  per  share  on  830  shares  not 
allotted. 

(6) 
Second  Call  Account  438,220.00 

To — Application  and  Allotment 

Account  438,220.00 

Second  call  of  $10  per  share  on  43,822 
shares  allotted. 

(7) 

Cash  438,220.00 

To — Second  Call  Account  438,220.00 

Cash  received  on  second  call. 

Copyright,  1919,  The  Ronald  Press  Company 


II-22-7 


(8) 

Third  Call  Account  $438,220.00 

To— Application  and  Allotment 

Account  %     438,220.00 

Third  call  of  $10  per  share  on  43,822 
Shares  allotted. 

(9) 
Cash  438,220.00 

To — Third  Call  Account  438,220.00 

Cash  received  on  third  call. 

ALTERNATIVE  SOLUTION 

(1) 
Unissued  Stock  $5,000,000.00 

To — Capital  Stock — Authorized  $5,000,000.00 

To  record  authorized  issue  of  100,000 
shares,  par  value  $50  each,  as  per 
minutes  of  stockholders'  meeting 

held  on See  certificate 

issued  by  the  Secretary  of  State 
under  date  of 

(2) 
Cash  111,630.00 

To--Appli cat ions  for  Stock  Subscrip- 
tions 111,630.00 
To  record  receipt  of  deposit  of  $2.50 
.per  share  on  44,652  shares  applied 
for, 

(3) 
Subscriptions  2,191,100.00 

To — Unissued  stock  2,191,100.00 

To  record  allotment  of  43,822  shares 
par  value  $50  each, 

(4) 
Subscription  Instalment  #1  438,220.00 

Subscription  Instalment  #2  (February  1)       438,220.00 
Subscription  Instalment  #3  (April  1)         438,220.00 

To — Subscriptions  1,314,660.00 

To  record  instalments  called  on  date 
of  allotment. 


Copyright,  1919,  The  Ronald  Press  Company 


II-22-8 

(5) 
Applications  for  Stock  Subscriptions       $111,630.00 

To — Subscription  Instalment  #1  $109,555.00 

Cash  2,075.00 

To  record  return  of  deposit  of  $2.50 
per  share  on  830  shares  applied  for 
but  not  allotted,  and  application  of 
balance  of  deposits  on  Subscription 
Instalment  #1. 

(6) 
Cash  328,665.00 

To — Subscription  Instalment  #1  328,665.00 

To  record  receipt  of  $7.50  per  share 
on  43,822  shares,  being  balance  due 
January  14. 

(7) 
Cash  438,220.00 

To— Subscription  Instalment  #2  438,220.00 

To  record  receipt  of  Instalment  #2  due 
on  February  1. 

(8) 
Cash  438,220.00 

To — Subscription  Instalment  #3  438,220.00 

To  record  receipt  of  Instalment  #3  due 
on  April  1. 

Solution  to  Problem  45 

Under  the  circumstances  referred  to  in  the  problem,  the  amount  cf  $10,000 
is  a  proper  charge  to  Good-Will,  because  the  new  company  acquired  less  in  the 
way  of  tangible  assets  than  it  supposed  at  the  time  the  property  was  purchased. 
Before  the  bookkeeper  spreads  the  entry  on  the  books,  the  proposed  treatment 
should  be  passed  upon  by  the  board  of  directors  or  at  least  the  executive 
officers  of  the  company. 

It  may  be  the  desire  of  the  board  to  write  off  the  amount  to  the  Accumulated 
Surplus  account.  In  so  doing  it  would  be  desirable  for  them  to  adopt  resolu- 
tions instructing  the  accounting  officer  to  deal  with  the  item  in  that  manner. 
In  the  event  it  is  decided  to  write  off  the  item,  the  whole  transaction  should 
be  clearly  set  forth  in  the  accounts  of  the  year  in  which  the  write-off  took 
place. 


Copyright,  1919,  The  Ronald  Press  Company 


II-22-9 

ADJUSTING  ENTRIES  ON  THE  CORPORATION'S  BOOKS 

Good-Will  $10,000.00 

To— Inventories  $10,000.00 

To  charge  off  the  clerical  error  of  $10,000 
in  the  calculation  of  the  inventories 

taken  over  from  the company. 

See  page of  minute  book  for  resolution 

authorizing  this  charge  adopted  by  the 
board  of  directors  at  a  meeting  held  on 


ALTERNATIVE  ENTRY 

Surplus  $10,000.00 

To — Inventories  $10,000.00 

To  charge  off  the  clerical  error  of  $10,000 
in  the  calculation  of  the  inventories 

taken  over  from  the  company. 

See  page  ...  of  minute  book  for  resolution 
authorizing  this  charge  adopted  by  the 
board  of  directors  at  a  meeting  held  on 


ANSWERS  TO  QUESTIONS 

Ansver  to  Question  111 — The  first  step  would  be  to  verify  the  amount  of  un- 
expired insurance  at  January  1,  1918.   If  this  amount  had  been  properly  calcu- 
lated the  proportion  pertaining  to  the  month  of  January,  1918,  should  be  charged 
to  the  operations  of  that  month.   The  balance  is  properly  chargeable  to  the 
Fire  Insurance  Recovery  account,  inasmuch  as  a  total  loss  having  been  incurred 
and  settled  for,  the  insurance  company  has  no  further  liability  under  the  policy. 

Answer  to  Question  112 — 

(a)  First  mortgage  6%  bonds  of  the  Progressive  Manufacturing  Co.,  par  value 
$100,000.   The  bonds  should  be  inspected,  and  preferably  the  inspection  should 
be  made  on  the  date  of  the  balance  sheet.  The  market  value  is  $3,000  less  than 
the  cost  or  book  value,  and  it  would  seen,  desirable,  if  not  necessary,  to  in- 
troduce a  reserve  to  cover  the  possible  loss  on  realization.  The  voucher  cover- 
ing the  purchase  of  the  bonds  in  the  first  instance  should  be  examined* 

(b)  Second  preferred  stock  (par  value  $175,000).   The  shares  evidencing 
this  stock  ownership  should  be  inspected  on  the  date  of  the  balance  sheet  if 
possible.   The  market  value  is  $5,000  in  excess  of  the  cost  value  and  therefore 
the  inclusion  of  the  asset  in  the  balance  sheet  at  the  cost  value  would  be  the 
conservative  treatment  to  adopt.   The  voucher  issued  in  payment  of  the  shares 
should  be  examined  as  evidence  supporting  the  cost  price. 


Copyright,  1919,  The  Ronald  Press  Company 


11-22-10 

In  the  case  of  both  (a)  and  (b)  it  might  be  advisable  to  refer  to  the 
minutes  of  the  proceedings  of  the  directors'  meetings  to  determine  whether 
or  not  the  purchases  were  approved  by  the  board. 

Answer  to  Question  115 — An  inventory  of  a  large  5  and  10  cent  store  would 
consist  primarily  of  a  very  large  number  of  small  items.  In  verifying  the  exten- 
sions of  such  an  inventory  prove  the  largest  items  and  scrutinize  a  portion  of 
the  others  so  as  to  ascertain  whether  they  are  approximately  correct.  In  a 
case  of  this  kind  a  comptometer  or  other  mechanical  device  would  be  of  great 
value. 

Answer  to  Question  114 — 

(a)  Advertising  incurred  in  connection  with  the  sale  of  goods  for  the  spring 
season  of  1919  may  be  properly  carried  forward  as  a  deferred  charge,  at  say 
December  31,  1918,  only  in  those  lines  of  business  which  are  termed  "seasonal" 
in  that  the  expenses  involved  in  making  the  sales  for  a  season  are  generally 
incurred  in  one  period  while  the  sales  are  taken  up  as  income  in  the  following 
period.  In  such  cases  there  can  be  no  serious  objection  to  the  carrying  forward 
of  the  advertising  expense  to  the  period  in  which  the  sales  are  credited.  But 
where  the  advertising  cannot  be  directly  connected  with  the  sales  of  a  particu- 
lar period,  good  business  practice  as  well  as  conservative  accounting  requires 
that  such  advertising  be  charged  off  in  the  period  in  which  the  advertisement 
was  run.  Any  other  practice  generally  results  in  a  constantly  increasing  ac- 
cumulation of  deferred  charges  which  should  have  been  taken  care  of  in  the 
operations  of  past  periods. 

(b)  Traveling  expenses  of  salesmen  in  disposing  of  goods  for  shipment  in  the 
spring  of  1919  v;ould  follow  the  principles  outlined  in  (a).  In  this  case  it  is 
somewhat  easier  to  connect  the  expense  with  the  sales, 

(c)  It  must  be  admitted  that  some  part  of  the  general  and  office  expenses 
of  1918  were  incurred  in  connection  with  the  securing  of  orders  for  delivery  in 
the  1919  season,  and  it  would  therefore  seem  that  such  expense  is  properly 
chargeable  to  that  season.  But  it  must  be  noted  that  where  this  is  done  it  is 
essential  to  provide  out  of  1918  operations  the  expense  which  will  be  incurred 
in  the  collection  of  accounts  and  notes  receivable,  etc. 

Consequently  it  is  generally  accepted  that  if  these  expenses  are  not  unusual 
in  character  and  are  annually  recurrent,  no  portion  thereof  should  be  carried 
forward.  But  if  in  any  particular  case  it  should  be  found  that  a  part  of  these 
expenses  were  unusual  and  pertained  solely  to  the  season  of  1919,  it  may  be 
permissible  to  carry  forward  as  a  deferred  charge  only  that  portion  of  the  gen- 
eral and  office  expense. 

From  an  operating  point  of  view  it  is  essential  that  the  practice  at  the 
beginning  and  end  of  a  period  shall  be  the  same. 

Answer  to  Question  115 — 

(a)  Investments  in  other  companies  held  as  marketable  investments  should, 
in  most  cases,  be  valued  on  the  basis  of  market  or  cost,  whichever  is  the  lower, 

•  Copyright,  1919,  The  Ronald  Press  Company 


11-22-11 

(b)  Investments  in  other  companies  held  as  permanent  investments  should 
be  valued  at  the  cost  thereof,  except  for  the  subsequent  adjustment  of  that 
value  in  respect  of  (1)  proportion  of  profits  or  losses  arising  from  operations 
and  (2)  dividends  received. 

In  this  connection  it  might  be  well  to  quote  from  Mr.  Dickinson's  paper, 
■Profits  of  a  Corporation,"  dealing  with  the  valuation  of  investments  in  other 
companies  held  as  marketable  investments: 

■The  term  marketable  investments  is  intended  to  include  only  such  invest- 
ments as  are  part  of  the  circulating  as  distinct  from  the  fixed  assets.   The 
latter  class  of  investments  may  be  defined  as  those  which  cannot  be  disposed  of 
without  affecting  the  operations,  for  the  reason  that  the  ownership  thereof 
in  a  permanent  form  is  necessary,  however  remotely,  to  the  business  which  the 
corporation  is  carrying  on.  Their  valuation  would  be  governed  by  the  same 
principles  as  have  been  outlined  above  for  other  fixed  assets. 

■Marketable  investments,  on  the  other  hand,  may  be  either: 

(a)  The  stock  in  trade  of  the  corporation. 

(b)  The  investment  of  surplus  cash  held  in  this  form  until  required  for 

ordinary  operating  purposes. 

(c)  The  investment  of  a  reserve  or  other  special  fund. 

■In  case  (a)  the  rule  of  cost  or  market  value,  whichever  is  the  lower, 
applied  to  each  individual  investment  and  not  to  the  group  as  a  whole,  is  un- 
doubtedly the  most  conservative.   That  is  to  say,  no  profit  could  be  taken  up 
on  any  investment  until  it  is  sold,  but  on  the  other  h£ind,  where  the  value  has 
clearly  fallen,  some  provision  should  be  made  therefor.  Where,  however,  the 
investments  all  have  a  definitely  ascertainable  market  value  at  any  time,  it 
is  perhaps  fair  and  reasonable  to  allow  a  fall  in  value  of  some  individual 
investments  to  be  set  off  against  a  rise  in  value  of  others,  provided  that  the 
aggregate  valuation  is  not  above  original  cost  or  market  value,  whichever  is 
the  lower, 

■In  case  (b)  the  usual  custom  is  to  value  at  the  mean  market  price  on  the 
last  day  of  the  fiscal  period  for  the  reason  that  the  investments  represent  the 
equivalent  of  cjish  and  should  therefore  be  maintained  at  their  cash  value  in  the 
balance  sheet. 

■In  case  (c)  any  profit  or  loss,  either  realized  or  estimated,  would  be  a 
credit  or  charge  to  that  fund,  and  not  to  the  Profit  and  Loss  account.  But  in 
the  balance  sheet  such  investments  should  either  be  clearly  stated  as  maintained 
at  cost  or  preferably  be  adjusted  each  year  to  the  aggregate  market  value  if 
below  cost. 

•Another  method  of  dealing  with  the  fluctuations  of  marketable  investments 
of  classes  (b)  and  (c)  is  to  create  an  investment  fluctuation  reserve,  either 
out  of  estimated  or  realized  profits  on  investments,  or  by  a  charge  to  Profit 
and  Loss  of  such  an  amount  as  may  be  necessary  to  prevent  this  reserve  from 
showing  a  debit  balance,  and  by  charges  or  credits  to  this  reserve  to  maintain 
the  asset  at  market  value." 

REFERENCES : 

Montgomery,  pages  120-128;  134-145 
Wlldman,  pages  134;  66-77;  121-129 

Copyright,  1919,  The'Ronald  Press  Company 


11-22-13 


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Copyright,  1919,  The  Ronald  Press  Company 


II-23-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  23 
CURRENT  LIABILITIES 


Problem  50 

The  Martin  Manufacturing  Co.,  the  United  States  Specialty  Co.,  and  the 
firm  of  Brown  4  Smith  (a  partnership)  decide  to  consolidate  under  the  name  of 
the  Progressive  Manufacturing  Co.,  with  an  authorized  capital  stock  of 
$1,300,000  divided  between  7%  cumulative  preferred  stock  of  $500,000  and  com- 
mon stock  of  5800,000. 

Under  the  agreement  of  purchase  the  vendors  receive  preferred  stock  (at  par) 
for  the  net  tangible  assets  and  common  stock  for  good-will.   The  issue  of 
common  stock  to  be  based  upon  a  sum  equal  to  ten  times  the  average  annual  earn- 
ings of  the  past  five  years,  after  allowing  7%  interest  on  the  capital  invested. 
The  following  balance  sheets  reflect  the  financial  position  of  the  respective 
interests  at  the  date  of  the  consolidation.   (Brown  &  Smith  share  profits  or 
losses  equally. ) 


ASSETS 


MARTIN   UNITED  STATES   BROWN  & 


MFG.  CO.   SPECIALTY  CO. 


SMITH 


Plant  and  Equipment 

Accounts  and  Notes  Receivable 

Inventory 

Insurance  Unexpired 

Discount  Paid  in  Advance 

Cash 


^102,000.00  $145,000.00   $  95,500.00 


62,400.00 
48,500.00 

1,250.00 
500.00 

5,600.00 


78,500.00 

61,500.00 

1,700.00 


38,700.00 

43.650.00 

800.00 


7,250.00 


8,650.00 


$220,250.00  $293,950.00   $187,300.00 


Capital  Stock 

Brown — Capital  Account 

Smith — Capital  Account 

Accounts  and  Notes  Payable 

Accrued  Interest 

Accrued  Taxes 

Labor  Unpaid 

Surplus 


LIABILITIES 

$100,000.00 


36,100.00 


750.00 

1,400.00 

82,000.00 


$150,000.00   $• 


86,075.00 

850.00 

825.00 

2,200.00 

54,000.00 


72,000.00 
42,000.00 
70,230.00 

1,220.00 
600.00 

1,250.00 


$220,250.00  $293,950.00   $187,300.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-23-2 

YEARLY  EARNINGS 

First  Year  $  37,500.00  $  42,700.00   $  33,400.00 

Second  Year  48,700.00  31,800.00  26,900.00 

Third  Year  43,400.00  39,600.00  27,350.00 

Fourth  Year  36,200.00  46,100.00  31,600.00 

Fifth  Year  59,200.00  39,800.00  30,750.00 


$225,000.00  $200,000.00   $150,000.00 


Prepare  the  following: 

(a)  Opening  journal  entries  on  the  books  of  the  Progressive  Manufacturing 

Co. 

(b)  Balance  sheet  after  giving  effect  to  the  entries  referred  to  in  (a), 

(c)  Necessary  journal  entries  to  close  the  books  of  the  respective 

vendors. 

Problem  51 

A  share  and  investment  corporation  promotes  a  subsidiary  corporation,  and 
on  January  1,  1918,  subscribes  $30,000  worth  of  stock,  receiving  also  $70,000 
stock  as  consideration  for  its  services  as  promoter.   Its  promotion  expenses 
amounted  to  $500.  Sales  of  its  holding  in  the  subsidiary  corporation  are  made 
as  follows:  ^^^^^ 

STOCK  REALIZED 

February  $  5,000.00  $1,000.00 

March  10,000.00  2,500.00 

April  10,000.00  3,000.00 

May  10,000.00  5,500.00 

June  10,000.00  7,500.00 

October  5,000.00  1,500.00 

At  December  31,  1918,  the  parent  corporation's  financial  year  closes,  at 
which  date  it  holds  a  balance  of  $50,000  stock,  the  current  market  price  being 
$25  per  $100  stock. 

Give  detailed  ledger  account,  bringing  down  the  balance  at  the  figure  at 
which  it  should  be  shown  on  the  balance  sheet,  and  assign  your  reasons  for  the 
valuation  you  place  upon  itt 

QUESTIONS  ON  AUDITING 

Question  126 — As  auditor,  how  would  you  satisfy  yourself  as  to  the  accuracy 
of  the  liability  Notes  Payable  as  shown  by  the  balance  sheet? 

Question  127 — As  auditor,  how  would  you  satisfy  yourself  as  to  the  accuracy 
of  the  liability  Accrued  Taxes? 

Question  128 — Outline  the  procedure  to  be  followed  in  the  audit  of  the 
materials,  supplies,  and  coal  inventory  of  a  small  electric  light  company  which 
generates  its  own  electricity. 

Copyright,  1919,  The  Ronald  Press  Company 


II-23-3 

Question  129 — In  the  course  of  an  audit  of  a  wholesale  and  retail  butcher 
shop  you  find  that  all  meats  have  been  inventoried  at  the  market  price  thereof 
at  the  date  of  inventory, 

(a)  Has  the  inventory  been  priced  on  the  correct  basis? 

(b)  How  would  you  verify  the  prices  used  by  the  management? 

Question  150 — What  is  your  understanding  of  the  following: 

(a)  Mortgage  bonds 

(b)  Collateral  trust  bonds 

(c)  Income  bonds 

(d)  Debentures 

Solution  to  Problem  46 

JOURNAL  ENTRIES  ON  THE  BOOKS 
OF  THE  UNIVERSAL  MANUFACTURING  CORPORATION 


(1) 
Unissued  Capital  Stock 

To — Authorized  Issue  Capital  Stock 
To  record  authorized  issue  of  capital 
stock,  as  per  certificate  of  incor- 
poration issued  by  the  Secretary  of 
State  under  date  of . .  • •  • 

(2) 

Real  Estate  and  Buildings 

Plant 

Cash 

Bills  Receivable 

Horses,  Wagons,  and  Harness 

Office  Furniture 

Good-Will 

To— Smith  Manufacturing  Co.,  Vendor 
To  record  the  purchase  of  the  foregoing 
assets  from  the  Smith  Manufacturing 
Co.,  in  accordance  with  contract 

dated and  resolutions 

adopted  by  the  directors  at  a  meeting 
held  on. • . «. 

(3) 
Real  Estate  and  Buildings 
Plant 
Cash 

Bills  Receivable 
Horses,  Wagons,  and  Harness 
Office  Furniture 
Good-Will 

To— Young  Manufacturing  Co.,  Vendor 


12,000,000.00 


680,000.00 

390,000.00 

15,000.00 

10,000.00 

4,000.00 

1,000.00 

122,222.22 


327,000.00 
160,000.00 
3,000.00 
6,000.00 
3,000.00 
1,000.00 
55,555.56 


$2,000,000.00 


1,222,222.22 


555,555.56 


Copyright,  1919,  The  Ronald  Press  Company 


II-23-4 


To  record  the  purchase  from  the  Young 
Manufacturing  Co.  of  the  above  assets 

as  per  contract  dated 

and  resolutions  adopted  by  the  di- 
rectors at  a  meeting  held  on. • • 

(4) 

Real  Estate  and  Buildings 

Plant 

Cash 

Horses,  Wagons,  and  Harness 

Office  Furniture 

Good-Will 

To — Star  Manufacturing  Co.,  Vendor 
To  record  the  purchase  of  the  foregoing 
assets  from  the  Star  Manufacturing 
Co.  under  the  terms  and  conditions 
recited  in  the  contract  of  sale  dated 

and  resolutions 

adopted  by  the  directors  at  a  meet- 
held  on... •. 


$126,000.00 

71,000.00 

1,000.00 

1,500.00 

500.00 

22,222.22 


$222,222.22 


(5) 
Cash 

To — Unissued  Capital  Stock 
Proceeds  from  sale  of  one  share. 


100.00 


100.00 


(6) 
Smith  Manufacturing  Co.,  Vendor  Account 
Young  Manufacturing  Co. ,    "      " 
Star  Manufacturing  Co. ,     ■      ■ 
To — Cash 
Payment  in  cash. 


22.22 
55.56 
22.22 


100.00 


JOURNAL  ENTRIES  ON  BOOKS  OF 
STAR  MANUFACTURING  CO. 


(1) 
Profit  and  Loss  Account 

To — Real  Estate  and  Buildings 
Plant 

Horses,  Wagons,  and  Harness 
Office  Furniture 
To  record  the  loss  of  the  book  over  the 
appraisal  value  on  the  sale  of  the 
above  assets  to  the  Universal  Manu- 
facturing Corporation, 
NOTE — Probably  arose  from  the  failure 
to  provide  for  the  accrued  deprecia- 
•  tion  of  plant,  etc. 


$301,000.00 


$124,000.00 

176,000.00 

300.00 

700.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-23-5 


(2) 
Good-Will  %   22,222.22 

To— Profit  and  Loss  Account  $  22,222,22 

To  set  up  the  asset  of  good-will,  not 
heretofore  carried  on  the  books  of 
the  company. 

(3) 
Universal  Manufacturing  Corporation, 

Vendee  Account  222,222.22 

To — Real  Estate  and  Buildings  126,000.00 

Plant  71,000.00 

Cash  1,000.00 

Horses,  Wagons,  and  Harness  1,500.00 

Office  Furniture  500.00 

Good-Will  22,222.22 

To  record  sale  of  the  above  assets  to 
the  Universal  Manufacturing  Corpora- 
tion, under  the  terms  of  the  contract 
dated and  per  resolu- 
tion adopted  by  the  stockholders  and 
directors  at  a  meeting  held  on 


(4) 
Investment  in  Capital  Stock  of  Universal 

Manufacturing  Corporation  222,200.00 

Cash  22.22 

To — Universal  Manufacturing  Corpo- 
ration, Vendee  222,222.22 
Stock  and  cash  received  in  payment  for 
the  assets  sold  to  the  Universal 
Manufacturing  Corporation. 

(5) 
Bills  Payable  50,000.00 

Accounts  Payable  51,000.00 

To — Investment  in  Capital  Stock  of 
Universal  Manufacturing  Cor- 
poration 101,000.00 
Liquidation  of  bills  and  accounts  pay- 
able liabilities. 

(6) 
Capital  Stock  400,000.00 

To — Investment  in  Capital  Stock  of 
Universal  Manufacturing  Cor- 
poration 121,200.00 
Cash  22.22 
Profit  and  Loss  Account                        278,777.78 
To  record  final  distribution  of  assets. 

Copyright,  1919,  The  Ronald  Press  Company 


II-23-6 

Solution  to  Problem  47 

ENTRIES  ON  BOOKS  OF  WILSON  AND  WILSON 

(1) 

Unissued  Preferred  Stock  $  60,000.00 

Unissued  Common  Stock  240,000.00 

To — Preferred  Stock  $  60,000.00 

Common  Stock  240,000.00 

To  record  the  authorized  issue  of  capital 
stock  as  per  certificate  of  incorporation 
issued  by  the  Secretary  of  State  dated 


(2) 
Subscriptions  to  Capital  Stock  30,000.00 

To — Unissued  Common  Stock  30,000.00 

To  record  subscriptions  to  $30,000  of  the 
common  stock  of  the  Company,  as  follows: 
Charles  Wilson  $10,000.00 

Robert  Wilson  10,000.00 

Henry  Miller  10,000.00 


$30,000.00 


*  (3) 

Real  Estate  and  Buildings  165,000.00 

Machinery  and  Fixtures  39,000.00 

Horses,  Trucks,  and  Harness  4,500.00 

Patents  1,500.00 

Stocks  and  materials  20,000.00 

Notes  and  Loans  Receivable  5,000.00 

Accounts  Receivable  15,000.00 

To — Wilson  &  Wilson,  Vendor  Account  210,000.00 

Notes  Payable  6,000.00 

Accounts  Payable  34,000.00 

To  record  the  purchase  from  Charles  and 
Robert  Wilson  of  their  respective  in- 
terests in  the  foregoing  net  assets  as 

per  contract  of  sale  dated •• 

and  minutes  of  directors'  meeting  held 
on 

(4) 

Wilson  and  Wilson,  Vendor  Account  210,000.00 

To — Unissued  Common  Stock  210,000.00 

To  record  issue  of  stock  in  payment  for  the 
assets  referred  to  in  the  preceding  entry. 


Copyright,  1919,  The  Ronald  Press  Company 


II-23-7 


(5) 
Unissued  First  Mortgage  5%  Bonds  ^50,000.00 

To — Authorized  Issue  First  Mortgage  5% 

Gold  Bonds  $50,000.00 

To  record  the  authorized  issue  of  first 
mortgage  5%  gold  bonds  as  per  resolu- 
tion adopted  by  the  stockholders  at  a 
meeting  held  on... 

(6) 
Notes  Payable  6,000.00 

Accounts  Payable  34,000.00 

To — Unissued  Preferred  Stock  20,000.00 

Unissued  First  Mortgage  5%   Bonds  20,000.00 

To  record  the  liquidation  of  the  notes  and 
accounts  payable  liabilities  as  per 
agreement  made  with  these  creditors. 


ANSWERS  TO  QUESTIONS 
Answer  to  Question  116—' 

1.  Bookkeeper  should  prepare  statement  of  each  consignee's  account. 

2.  Compare  statement  with  ledger  account. 

3.  Rubber  stamped  with  request  to  examine  the  statement  and  notify  auditor 
whether  it  is  correct,  or  if  desired,  whether  it  is  not  correct. 

4.  Statement  mailed  by  auditor  in  envelope  bearing  auditor's  return 
address. 

5.  See  that  the  consignments  are  carried  in  the  Inventory  and  not  as 
accounts  receivable. 

6.  See  that  the  inventory  price  placed  on  these  consignments  is  the  same  as 
that  placed  on  similar  goods  in  the  stockroom.   If  there  is  nothing  to  indicate 
that  the  goods  will  be  returned,  or  will  not  yield  a  fair  price  when  sold,  it 
is  proper  to  add  to  the  inventory  price  any  expense,  such  as  freight,  insur- 
ance, etc.,.  incurred  by  the  consignor  or  consignee  in  connection  with  the  ship- 
ment. 

Answer  to  Question  117— The  broker  should  not  be  stated  as  a  debtor,  but  the 
item  should  be  shown  in  the  balance  sheet  as  "Stock  Sold,  Not  Yet  Delivered," 
since  payment  cannot  be  enforced  until  the  stock  is  delivered.   In  any  case  the 
actual  debtor  will  not  be  the  broker  but  his  principal. 

At  the  date  of  the  balance  sheet  the  stock  still  will  be  registered  in  the 
name  of  the  company  or  its  nominees.   Therefore,  the  stock  should  be  verified 
in  the  usual  manner  by  inspection  or  by  certificate.   The  broker's  sold  note 
should  also  be  examined. 


Copyright,  1919,  The  Ronald  Press  Company 


II-23-8 

Answer  to  Question  118— 

To  the  Board  of  Directors  of  the 
Blank  Manufacturing  Company, 
Chicago,  Illinois. 

Dear  Sirs: 

I  have  carefully  considered  the  advisability  of  your  company  pay- 
ing a  return  to  the  stockholders  on  their  investment  during  the  period 
of  construction  and  have  come  to  the  conclusion  that  it  is  inadvisable 
to  do  so  for  the  following  reasons: 

1.  Capital  is  invested  for  the  purpose  of  earning  profits,  and  until 

property  is  placed  on  a  revenue-producing  basis  (which  cannot 
take  place  until  the  plant  is  complete  as  an  operating  unit) 
there  can  be  no  profits. 

2.  The  legality  of  such  a  distribution  might  be  questioned,  since 

it  is  in  effect  a  payment  out  of  capital.  This  feature  had  best 
be  referred  to  the  company's  counsel  for  a  final  opinion. 

3.  It  is  poor  business  policy  to  increase  the  capital  investment  for 

the  purpose  of  providing  funds  to  pay  a  return  to  stockholders 
during  the  construction  period. 

Some  question  may  arise  as  to  the  proprietary  of  charging  interest 
on  BORROWED  capital  to  construction  since  it  is  not  considered  proper  to 
include  interest  on  INVESTED  capital  as  a  charge  to  Property  account. 

Borrowed  capital  is  a  liability,  and  the  interest  thereon  is  a  fixed 
charge  and  must  be  paid  even  though  there  are  no  profits.  Capital  stock 
is  the  proprietor's  investment  upon  which  no  return  can  be  paid  until 
profit  is  made. 

I  shall  be  glad  to  furnish  you  any  additional  information  that  may 
be  desired. 

Very  truly  yours, 

JOHN  DOE, 

Certified  Public  Accountant 


Copyright,  1919,  The  Ronald  Press  Company 


II-23-9 

Answer  to  Question  119 — Coal  in  transit  should  be  taken  up  and  shown  as  "Coal 
in  Transit"  under  the  Inventory  caption  or  the  balance  sheet  and  as  "Unaudited 
Invoices"  under  the  Current  Liabilities  caption.  In  case  the  client  refuses 
to  make  the  necessary  adjustment  the  auditor's  attitude  would  depend  on  the 
relative  importance  of  the  transaction.  If  the  amount  involved  is  (1)  relatively 
small,  (2)  has  no  material  bearing  on  the  current  liabilities,  and  (3)  the 
market  price  is  equal  to  or  more  than  the  cost  price,  the  auditor  may  pass  the 
point.   In  £iny  other  case  it  will  be  necessary  to  qualify  the  certificate  at- 
tached to  the  balance  sheet. 

The  coal  received  record  contains  the  car  numbers  of  each  car  received  and 
unloaded.   Comparison  of  the  invoices  with  the  freight  bills  will  be  of  assist- 
ance in  determining  whether  the  coal  stated  to  be  "in  trauisit"  was  actually 
received  and  included  in  the  inventory. 

Answer  to  Question  120 — In  the  case  of  a  retail  department  store  with  annual 
gross  sales  of  $2,500,000,  the  auditor  cannot  assume  responsibility  for  the 
inventory.   The  quantities  cannot  be  tested,  due  to  the  fact  that  at  the  time 
of  the  audit  the  goods  on  hand  at  inventory  date  have  been  disposed  of  to  a  very 
large  extent  and  new  goods  have  been  purchased.  The  inventories  are  so  large 
that  even  a  test  check  of  extensions  and  footings  is  impracticable  because  of 
the  expense  incident  to  the  proper  performance  of  this  work.  In  some  cases  it  is 
customary  to  have  an  outside  concern  prove  all  extensions  and  footings.  If 
this  concern  is  reliable,  a  certificate  as  to  the  work  done  may  be  accepted. 
The  prices  are  generally  shown  at  selling  price  less  the  per  cent  of  gross 
profit  added  when  the  goods  were  placed  in  stock.  The  clerical  accuracy  of  such 
prices  can  be  readily  tested.   On  account  of  the  character  of  the  inventory,  the 
market  price  is  apt  to  be  less  than  cost  on  a  very  large  number  of  articles. 
The  prices  to  be  placed  on  seasonable  goods,  shelf-worn,  or  slow-moving  goods 
is  an  extremely  important  point  as  to  which  a  satisfactory  solution  is  diffi- 
cult to  obtain. 

REFERENCES : 

Montgomery,  pages  146-167 
Wildman,  pages  150-155 


Copyright,  1919,  The  Ronald  Press  Company 


11-23-11 


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11-23-12 


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Copyright,  1919,  The  Ronald  Press  Company 


II-24-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  24 
FUNDED  DEBT  ;  RESERVES 


Problem  52 

On  January  1,  1918,  A  purchases  the  plant  and  business  of  B  for  $400,000, 
payable  $100,000  cash;  $150,000  January  1,  1919;  $150,000  January  1,  1920; 
with  interest  on  deferred  payments  at  6%.   Wone  of  the  book  accounts  or  stock  of 
finished  goods  on  hand  January  1,  1918,  are  included  in  the  sale,  but  are 
specifically  reserved  by  B.  Of  such  the  accounts  receivable  are  $28,500,  and 
finished  goods,  per  inventory,  $45,000.   The  agreement  further  stipulates  that 
B  shall  operate  the  plant  during  the  year  1918  and  shall  be  reimbursed  on 
January  1,  1919,  for  all  funds  advanced  for  supplies,  expense,  labor,  or  any 
other  purpose  in  connection  with  the  operation  of  the  business  during  1918,  as 
shown  by  B*s  books.   Such  advances  to  be  computed  monthly  and  to  bear  interest 
from  the  last  day  of  each  month  at  6%  per  annum  to  January  1,  1919.  The  profits 
of  the  business  for  the  year  1918  to  belong  to  A. 

On  December  31,  1918,  B  reports  that  inventory  of  finished  goods  on  hand  is 
$48,500.   Expenses  have  been  $284,000  and  sales  $350,000. 

Condensed  particulars  of  transactions  are  as  follows: 


January 

February 

March 

April 

May 

June 

July 

August 

September 

October 

November 

December 


SALES 

i  15,000.00 

10,000.00 

5,000.00 

5,000.00 

5,000.00 

5,000.00 

100,000.00 

80,000.00 

75,000.00 

25,000.00 

15,000.00 

10,000.00 


CASH 

COLLECTIONS 

$  10,000.00 

15,000.00 

10,000.00 

15,000.00 

5,500.00 

18,000.00 

55,000.00 

75,000.00 

55,000.00 

45,000.00 

50,000.00 

19,000.00 


CASH 
ADVANCES 
10,000.00 
25,000.00 
12,000.00 
32,000.00 
35,000.00 
25,000.00 
30,000.00 
25,000.00 
30,000.00 
30,000.00 
15,000.00 
15,000.00 


INTEREST 

DUE  B 

$   550.00 

1,250.00 

540.00 

1,280.00 

1,225.00 

750.00 

750.00 

500.00 

450.00 

300.00 

75.00 


$350,000.00  $372,500.00  $284,000.00  $7,670.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-24-2 

B  presents  the  following  statement  to  A  on  January  1,  1919,  and  requests 
settlement: 

Sale  of  Plant  and  Business  as  per  contract  $400,000.00 

Less — Cash  paid  by  A  January  1,  1918  100,000.00 


$300,000.00 
Interest  at  6%,  1  year  18,000.00 

Advanced  by  B  monthly  284,000.00 

Interest  on  Advances  7,670.00 


$609,670.00 
Sales  350,000.00 


Balance  due  B  $259,670.00 

Of  which  $150,000  deferred  to  January  1,  1920       150,000.00 


Due  January  1,  1919  $109,670.00 


A  is  not  satisfied  with  statement  and  employs  certified  public  accountants 
to  investigate  and  report  another  basis  of  settlement.   It  is  found  that  the 
accounts  receivable  December  31,  1918,  are  $6,000  and  B  has  taken  these,  as 
well  as  the  finished  goods  remaining  on  hand  ($48,500)  and  claims  both  items 
belong  to  him.  There  are  no  liabilities.  . 

Make  statement  for  A,  as  requested,  using  your  own  methods.  B's  statement 
of  interest  on  advances  may  be  assumed  to  be  correct  in  this  question. 

Problem  55 

A  land  development  company  organizes  with  a  capital  stock  of  $30,000  of 
which  $5,000  is  issued  for  organization  expenses. 

The  company  purchases  a  tract  of  land  for  $50,000,  giving  a  mortgage  of 
$34,000  in  part  payment,  and  expends  $13,000  for  surveys,  grading,  etc.,  part  in 
cash  and  part  on  book  account.   The  company  also  erects  two  similar  dwelling 
houses  at  a  cost  of  $13,000 — part  in  cash,  part  on  book  account ,  and  part  on  sites 
within  its  land,  representing  a  further  value  of  $1,200.   One  of  said  houses  is 
sold  for  $9,000. 

The  sales  of  lots  amount  to  $30,200,  including  purchase  money  mortgages 
taken  to  secure  part  consideration  on  which  interest  to  the  amount  of  $750  is  re- 
ceived, said  mortgages  being  in  turn  pledged  by  the  company  for  a  loan. 

The  company  pays  $11,300  on  account  of  the  $34,000  mortgage,  to  release 
from  incumbrance  lots  sold,  and  gives  notes  in  settlement  of  book  accounts  to 
the  sum  of  $4,000* 


Copyright,  1919,  The  Ronald  Press  Company 


The  cash  transactions  are  as  follows: 


II-24-3 


RECEIPTS 
Capital  Stock 
Purchasers'  Accounts 
Loan 
Commissions  and  Fees 


$25,000.00 

20,825.00 

12,000.00 

905.00 


PAYMENTS 
Organization  Expenses 
Land  Purchased 
Surveying  and  Grading 
Accounts  Payable 
Bills  Payable 
Construction  of  Dwellings 
Mortgage  Payable 
Interest 

Expense,  Rent,  Salaries, 
etc. 


Balance 


$58,730.00 


$  625.00 
16,000.00 
6,000.00 
1,000.00 
3,000.00 
7,000.00 
11,300.00 
1,719.00 

7,500.00 

$54,144.00 
4,586.00 

$58,730.00 


Inventory:  Land  $42,000,  Dwelling  $7,100. 

Prepare  ledger  accounts,  profit  and  loss  accounts,  and  balance  sheet. 


QUESTIONS  ON  AUDITING 

Question  131 — What  steps  do  you  consider  that  an  auditor  should  take  in  the 
verification  of  the  following? 

(a)  First  Mortgage  5%  Bonds  issued  and  outstanding,  $250,000 

(b)  Preferred  Stock  issued  and  outstanding,  $200,000 

Question  132 — In  the  examination  of  the  accounts  of  an  important  railroad, 
it  appears  that  none  of  the  invoices  and  material  purchased  appear  on  the 
company's  books  until  they  have  been  approved  by  the  purchasing  agent  and 
division  superintendents,  although  the  various  storekeepers'  reports  show  that 
much  of  the  material  and  supplies  has  actually  been  received. 

How  would  you  deal  with  such  a  condition  and  determine  the  real  position 
of  the  railroad  with  respect  to  purchases  not  taken  up  on  the  voucher  register? 

Question  133 — The  Bristol  Manufacturing  Co.  issued  and  sold  on  the  1st  of 
January,  1918,  to  A  and  B,  100  (50  to  each  at  the  same  price)  first  mortgage 
bonds  of  $500  each,  bearing  interest  at  4%  per  annum,  and  received  $48,000  in 
cash.  What  records  of  the  transaction  should  be  made,  and  in  what  books? 

Question  134 — How  should  the  following  items  be  dealt  with  in  the  accounts 
of  a  company: 

(a)  Discount  on  bonds  or  stock 

(b)  Premium  on  stock  or  bonds 

(c)  Common  stock  issued  as  a  bonus  with  the  sale  of  preferred  stock 

How  would  you  audit  the  foregoing  transactions? 


Copyright,  1919,  The  Ronald  Press  Company 


I 1-24-4 

Question  155 — A  charitable  institution  receives  annual  subscriptions  and 
donations  and  employs  a  csinvasser  who  has  to  induce  persons  to  become  sub- 
scribers and  who  is  also  authorized  to  receive  subscriptions  and  donations. 

State  what  you  consider  the  best  system  of  bookkeeping  to  guard  against 
peculation  and  what  regulations  you  would  lay  down  for  the  conduct  of  the 
financial  affairs  of  the  institution. 


Solution  to  Problem  48 


Exhibit  I 


WHITE  MANUFACTURING  COMPANY 
BALANCE  SHEET,  DECEMBER  31,  1918 


ASSETS 
CAPITAL  ASSETS  (subject  to 
accrued  depreciation  not 
provided  for) : 
Real  Estate  $  24,000.00 
Buildings      36,783.11 
Mach.  & 
Equip.        87,105.99  $147,889.10 


CURRENT  ASSETS: 
Inventories  of: 
Raw 

Material   $  69,075.23 
Work  in 


Progress 
Finished 
Product 


Customers* 

Accts. 
Notes 

Receivable 
Cash 


14,908.17 

27,575.50 

$111,558.90 

96,798.93 

21,678.03 

10,751.02  240,786.88 


DEFERRED  CHARGES: 
Insurance  Unexpired 


593.44 


LIABILITIES 
CAPITAL  STOCK: 

Issued  and  Outstanding 
2,000  shares  Par 
Value  $100 

CURRENT  LIABILITIES: 

Notes  Payable  $  45,000.00 
Accts. 

Payable       39,632.95 
Dividend 

Payable  Jan. 

15,  1919       6,000.00 


$200,000.00 


SURPLUS : ' 
Balance  at 

Jan.  1,  1918  $  69,304.48 
Add — Surplus 

Net  Profits 

for  year 

ending  Dec. 

31,  1918 

(Exhibit  II)   35,331.99 


Deduct — 
Dividends 


$104,636.47 
6,000.00 


Balance  at  Dec.  31,  1918 
(subject  to  accrued 
depreciation  not 
provided  for) 


90,632,95 


$389,269.42 


98,636.47 
$389,269.42 


Copyright,  1919,  The  Ronald  Press  Company 


WHITE  MANUFACTURING  COMPANY 

STATEMENT  OF  PROFITS  AND  INCOME 

FOR  YEAR  ENDING  DECEMBER  31,  1918 


I 1-24-5 


Exhibit  II 


SALES 

Deduct— Discounts  on  Sales 
Allowances  on  Sales 
Freight 

NET  PROCEEDS  FROM  SALES 
DEDUCT—Cost  of  Goods  Sold  (Exhibit  III) 

GROSS  PROFIT  ON  SALES 
ADD — Miscellaneous  Income: 
Interest  Received 
Discounts  on  Purchases 


TOTAL  PROFITS  AND  INCOME  FROM  ALL  SOURCES 


DEDUCT— SELLING  AND  GENERAL  EXPENSES: 
Selling  Expenses  (Exhibit  IV) 
General  Expenses  (Exhibit  V) 


NET  PROFITS  FROM  OPERATION 
DEDUCT — Interest  Paid 

SURPLUS  NET  PROFITS  (Exhibit  I) 


$19,419.87 
13,081.14 
10,439.23 

AMOUNT 
$620,033.89 

42,940.24 

PER  CENT. 

$577,093.65 
514,996.90 

100.00 
89.24 

$  2,909.43 
6,487.11 

$  62,096.75 
9,396.56 

10.76 
1.63 

SOURCES 

$  71.493.31 
31,377.82 

12.39 

$19,377.82 
12,000.00 

3.36 
2.08 

5.44 

$  40,115.49 
4,783.50 

6.95 
.83 

$  35,331.99 

6.12 

Copyright,  1919,  The  Ronald  Press  Company 


I 1-24-6 


Exhibit  III 


WHITE  MANUFACTURING  COMPANY 
STATEMENT  OF  COST  OF  MANUFACTURE  AND  GOODS  SOLD 
YEAR  ENDING  DECEMBER  31,  1918 

MATERIALS : 

Inventory  of  Raw  Material  at  January  1,  1918      $  38,983.45 

Purchases  $293,839.18 

Freight-In  18,067.50   311,906.68 


LESS — Inventory  at  December  31,  1918 

WAGES 

FACTORY  EXPENSES: 

Superintendent ' s  Salary 

Light,  Heat,  and  Power 

Insurance 

Repairs  and  Maintenance 

Sundry  Factory  Expenses 


DEDUCT— WORK  IN  PROGRESS  INVENTORY  VARIATION; 
Inventory  at  January  1,  1918 
Inventory  at  December  31,  1918 

COST  OF  FINISHED  PRODUCT  MANUFACTURED 
ADD—FINISHED  PRODUCT  INVENTORY  VARIATION: 
Inventory  at  January  1,  1918 
Inventory  at  December  31,  1918 

COST  OF  GOODS  SOLD  (Exhibit  II) 


$350,890.13 
69,075.23 


3,000.00 

2,908.38 

810.54 

22,037.73 

6,093.17 


$281,814.90 
160,511.92 


34,849.82 


$477,176.64 
$14,908.17    14,908.17 


$  80,303.93 
27,575.50 


WHITE  MANUFACTURING  COMPANY 
STATEMENT  OF  SELLING  EXPENSES 
YEAR  ENDING  DECEMBER  31,  1918 


Salesmen's  Salaries  eind  Commissions 
Salesmen's  Traveling  Expenses 
Bad  Debts 


TOTAL  SELLING  EXPENSES  (Exhibit  II) 


$462,268.47 

52,728.43 
$514,996.90 

Exhibit  IV 


$11,425.50 
6,638.19 
1,314.13 

$19,377.82 


Copyright,  1919,  The  Ronald  Press  Company 


II-24-7 


WHITE  MANUFACTURING  COMPANY 

STATEMENT  OF  GENERAL  AND  ADMINISTRATIVE  EXPENSES 

YEAR  ENDING  DECEMBER  31,  1918 


Officers'  Salaries 


Exhibit  V 


$12,000.00 


TOTAL  GENERAL  AND  ADMINISTRATIVE  EXPENSES  (Exhibit  II)   $12,000.00 


Solution  to  Problem  49 


JOURNAL  ENTRIES 


(1) 
Cash  %     3,487.11 

First  Mortgage  6%  W  Ry.  Co.  Bonds  75,000.00 

6%   Mortgage  Loans  40,000.00 

Preferred  Stock  (at  par)  Allen  Mfg.  Co.        125,000.00 
Notes  Receivable  30,000.00 

Household  Furniture  1,000.00 

Accrued  Interest  as  follows:  1,475.00 

Bonds  %     750.00 

Loans  600.00 

Notes  Receivable  125.00 


$1,475.00 


To — Estate  Account 

Sundry  Liabilities 
To  record  inventory  of  estate  of  A 
as  filed  in  probate  court  on....< 


$263,962.11 
12,000.00 


(2) 
Estate  Account 

To — Household  Furniture 
To  record  transfer  of  household  furniture  to 
A's  widow  in  accordance  with  the 
terms  of  the  will. 


1,000.00 


1,000.00 


(3) 
Preferred  Stock 

To — Estate  Account 
To  transfer  profit  on  sale  of  Allen 
Manufacturing  Co.  preferred  stock. 


5,000.00 


5,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-24-8 


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Copyright,  1919,  The  Ronald  Press  Company 


I 1-24- 9 


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Copyright,  1919,  The  Ronald  Press  Company 


11-24-10 

In  case  the  widow  died  October  31,  1918,  no  change  need  be  made  in  respect  of 
the  cash  transactions,  but  the  following  additional  journal  entries  would  be 
required: 

(4) 
Accrued  Interest  $  375.00 

To—Income  $  375.00 

To  take  up  interest  accrued  from  October  1  to 
October  31  on  first  mortgage  6%   W  Ry.  Co. 
bonds. 

(5) 
Accrued  Interest  400.00 

To — Income  400.00 

To  take  up  interest  accrued  from  September  1  to 
October  31  on  6%  mortgage  loans. 

(6) 
Accrued  Interest  625.00 

To — Income  625.00 

•  To  take  up  interest  on  notes  receivable  at  5% 
from  June  1,  1918,  to  October  31,  1918. 

(7) 
Income  1,400.00 

To — Estate  of  A's  Widow  1,400.00 

To  transfer  income  accrued  to  A's  widow  at 
October  31,  1919. 


Copyright,  1919,  The  Ronald  Press  Company 


11-24-11 


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Copyright,  1919,  The  Ronald  Press  Company 


11-24-12 

ANSWERS  TO  QUESTIONS 
Answer  to  Question  121 — 

The  books  and  accounts  to  be  opened  are  as  follows: 

1.  Books  to  be  kept: 

Ledger 

Journal 

Cash  book  -^ 

2.  Accounts  to  be  opened: 

Real  Estate 

Share  in  Partnership  ; 

Shares  of  Stock 

Household  Furniture 

Cash  at  Bsinkers 

Estate 

Income 

The  accountant  should  obtain  a  copy  of  the  appraisal  as  filed  in  the 
probate  court  and  acquaint  himself  with  all  provisions  in  the  will  affecting 
the  accounts.  Ke  must  apportion  all  receipts  as  between  principal  and  income, 
and  for  this  purpose  a  cash  book  providing  separate  columns  on  each  side  for 
principal  and  income  will  be  of  advantage. 

Answer  to  Question  122 — The  auditor  should  call  for  a  certified  copy  of  the 
inventory  filed  in  the  probate  court.   Comparison  of  this  inventory  with  the 
opening  journal  entry  would  be  a  satisfactory  verification. 

Answer  to  Question  125— 

CASH  RECEIPTS 
DATE      FROM  WHOM      PARTICULARS       FOLIO       PRINCIPAL       INCOME 

CASH  DISBURSEMENTS 
DATE       TO  WHOM       PARTICULARS       FOLIO       PRINCIPAL       INCOME 

Answer  to  Question  124 — 

(a)  Interest  accrues  from  day  to  day.   Consequently  all  interest  from 
bonds  accrued  up  to  and  including  the  date  of  death  would  be  principal ;  all 
interest  accrued  subsequent  thereto  should  be  credited  to  income. 

(b)  A  dividend  becomes  income  to  the  stockholder  on  the  day  it  is  declared. 
Consequently,  all  dividends  declared  up  to  and  including  the  date  of  death  would 
be  principal ;  dividends  declared  after  the  date  of  death  should  be  credited  in 
toto  to  income. 

The  rule  of  law  in  respect  of  stock  dividends  is  unsettled.   In  some  juris- 
dictions stock  dividends  are  not  differentiated  from  other  dividends,  and  the 
date  of  declaration  determines  whether  it  is  principal  or  income.   In  other 
jurisdictions  it  has  been  held  that  stock  dividends  should  be  apportioned  be- 
tween principal  and  income.   (See  Howe,  "American  Law  of  Principal  and  Income. ") 

Copyright,  1919,  The  Ronald  Press  Company 


11-24-13 

(c)  There  is  no  clear  rule  of  law  as  to  the  apportionment  of  rent  between 
principal  and  income.   In  some  jurisdictions  the  courts  hold  that  the  date  the 
rent  falls  due  is  the  determining  factor.   In  such  cases  rent  due  on  or  before 
the  date  of  death  would  be  principal  irrespective  of  whether  such  rents  be  pre- 
paid or  accrued.   In  other  jurisdictions  the  courts  hold  that  rents  should  be 
apportioned  over  the  period  covered  by  the  payments.  In  such  cases  rents 
accrued  prior  to  the  date  of  death  would  be  principal  irrespective  of  whether  the 
rental  is  paid  prior  or  subsequent  thereto. 

Answer  to  Question  125 — Under  the  last  will  and  testament  of  Henry  Rogers 
the  widow  is  entitled  to  all  income  from  the  estate  during  her  lifetime. 
Whether  this  income  is  actually  received  in  cash  during  her  lifetime  is  immate- 
rial;  the  widow's  estate  would  be  credited  with: 

1.  All  interest  accrued  on  bonds  from  March  16  to  April  15,  inclusive. 

2.  All  dividends  declared  on  stocks  from  March  16  to  April  15,  inclusive, 

unless  in  this  jurisdiction  the  courts  should  require  the  appor- 
tionment of  stock  dividends. 

3.  All  rents  paid  from  March  16  to  April  15,  inclusive,  unless  in  this 

jurisdiction  the  courts  should  require  the  apportionment  of 
/     rents. 

REFERENCES : 

Montgomery,  pages  157-158;  181-185;  194-199;  388-389 
Wildman,  pages  148-150 


Copyright,  1919,  The  Ronald  Press  Company 


11-24-15 


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Copyright,  1919,  The  Ronald  Press  Company 


II-25-1 


COMPLETE  ACCOUNTING  COURSE—PART  II 

Lecture  25 

CAPITAL  STOCK;  SURPLUS;  PROFIT  AND  LOSS  ACCOUNT 


Problem  54 

From  the  following  trial  balance  abstracted  from  the  books  of  the  Edwards 
Manufacturing  Co.  at  December  31,  1918,  prepare  a  balance  sheet  as  of  that  date 
with  a  relative  statement  of  profits: 


PARTICULARS 
Preferred  Stock 
Common  Stock 

First  Mortgage  6%  Gold  Bonds 
Surplus  at  January  1,  1918 
Land 

Buildings 

Machinery  and  Equipment 
Tools  and  Running  Gear 
Notes  Receivable 
Customers*  Accounts 
Sundry  Debtors 
Notes  Payable 
Unpaid  Audited  Vouchers 
Matured  Bond  Interest  Coupons 
Inventory  Raw  Materials  at  January  1,  1918 
Inventory  Work  in  Progress  at  January  1,  1918 
Purchases  of  Raw  Materials 
Wages 

Light,  Heat,  and  Power 
Sales 

Traveling  Expenses  (Miscellaneous) 
Discounts  on  Sales 
Discounts  on  Purchases 
Freight-Inward 
Allowances  on  Sales 
Insurance — one-half  Manufacturing  and  one-half 

Selling 
Factory  Expenses 
Superintendent's  Salary 
Bad  Debts 
Royalties 
Officers'  Salaries 
Salesmen's  Salaries  and  Conmlssions 
Fre  i  ght -Out ward 


DEBITS 


23,500.00 
133,127.11 
64,133.34 
13,113.78 
19,422.03 
93,183.27 
1,378.34 


23,083.27 

10,100.00 

284,311.93 

149,327.31 

2,483.11 

1,983.50 
18,343.11 

19,067.27 
11,332.50 

2,450.00 

3,350,31 

2,400.00 

937.11 

3,307.50 

11,500.00 

10,375.50 

12,397.50 


CREDITS 
100,000.00 
125,000.00 
100,000.00 

42,493.98 


45,670.00 

33,198.34 

3,425.00 


583,111.37 


3,118.93 


Copyright,  1919,  The  Ronald  Press  Company 


II-25-2 

Salesmen's  Traveling  Expenses  3,983.21 

Cash  (Banks)  6,908.73 

Cash  (Deposited  with  Fiscal  Agent)  3,425.00 

Inventory  of  Finished  Product  January  1,  1918  78,111.30 

Repair  and  Maintenance  Expenditures  19,083.27 

Interest  Paid  9,398.32 


11,036,017.62  $1,036,017.62 


The  following  items  should  be  considered  in  preparing  the  balance  sheet 
with  the  relative  statement  of  profits: 

1.  Insurance  Unexpired  $  450.00 

2.  Accrued  Interest  on  Bonds  and  Notes  Payable  1,125.00 

3.  Taxes  Accrued  of  2,234.83 

4.  Inventory  of; 

a)  Raw  Materials  $24,308.14 

b)  Work  in  Process  33,987.32 

c)  Finished  Products  40,398.50 

5.  Wages  Accrued  13,134.87 

6.  Provide  Depreciation  for  the  year  on  the  bal- 

ance given  in  the  Trial  Balance  upon  the 
basis  of  the  following  rates: 

Buildings  2}^%  per  annum 

Machinery  and  Equipment   10%  per  annum 

Tools  and  Running  Gear    10%  per  annum 

Problem  55 

A  single-entry  set  of  books  for  1918  is  sent  to  you  with  an  order  to  state 
a  Profit  and  Loss  account  for  the  year  and  a  balance  sheet  at  December  31. 
The  starting  capital  was  $34,500. 

The  Accounts  Receivable  Jan.  1 

"  Accounts  Payable      "  " 

■  Merchandise  "  " 

"  Pl£int  and  Machinery   "  ■ 

"  Furniture  &  Fixtures  "  ■ 

A  Summary  of  the  cash  book  for  the  year  shows  as  follows: 

RECEIVED 
Accounts  Receivable  $30,000.00 

Capital  paid  in  2,500.00 

DISBURSED 

Bank  Overdraft  January  1  $  3,700.00 

Accounts  Payable  12,500.00 

General  Expense  5,000.00 

Wages  7,750.00 

Personal  Account  1,500.00 

leaving  a  bank  account  of  $2,000,  and  currency  on  hand  $50. 

Copyright,  1919,  The  Ronald  Press  Company 


$26,500.00 

Dec. 

31 

$44,000.00 

7,500.00 

II 

n 

9,750.00 

8,500.00 

n 

If 

9,500.00 

10,000.00 

■ 

■ 

10,000.00 

700.00 

n 

■ 

700.00 

II-25-3 

Provide  5%  interest  on  capital,  disregarding  additions  during  the  year  and 
personal  drafts,  deducting  10%  for  plant  and  machinery  depreciation,  5%  for 
furniture  and  fixtures,  and  5%  for  bad  debts. 

Problem  56 

A  company  with  head  office  in  Chicago  and  factory  at  South  Bend,  Indiana, 
conducts  three  selling  branches  in  New  York,  San  Francisco,  and  Montreal,  which 
are  supplied  with  goods  from  the  factory,  the  invoices  being  sent  out  from  the 
head  office. 

The  branches  keep  their  own  sales  ledgers,  send  out  monthly  statements  to 
customers,  and  receive  cash  against  their  ledger  accounts,  which  they  remit 
weekly  to  Chicago. 

All  branch  expenses,  including  salaries  and  wages,  are  paid  by  the  branches 
from  petty  cash  accounts,  kept  at  a  fixed  balance  of  ^500,  by  draft  on  head 
office. 

The  following  information  is  supplied  by  the  branches  at  December  31,  1918, 
summarizing  the  transactions  of  the  previous  six  months; 


NEW  YORK  SAN  FRANCISCO  MONTREAL 
Rents  and  Taxes  Paid  $   200.00  $   175.00  $    75.00 

Sales  for  6  months  to  December  31,  1918 
Salaries  and  Wages 
Return  Sales 
Allowances  to  Customers 
Bad  Debts 
Cash  Sales 

Cash  Received  from  Customers  on  Ledger  Ac- 
counts 
Debtors,  July  1,  1918 
Debtors,  December  31,  1918 
Petty  Cash  on  Hand,  July  1,  1918 
Petty  Cash  on  Hand,  December  31,  1918 
Stock,  July  1,  1918 
Stock,  December  31,  1918 
Goods  Received  from  Head  Office  Factory 

Prom  these  details  prepare  branch  accounts  as  they  should  appear  in  the  head 
office  books  and  draw  up  a  final  general  trial  balance  with  branch  profit  and  loss 
accounts. 


12,500.00 

11,800.00 

10,225.00 

1,650.00 

1,520.00 

1,600.00 

200.00 

100.00 

250.00 

50.00 

40.00 

30.00 

125.00 

60.00 

6,250.00 

5,380.00 

6,100.00 

10,850.00 

10,260.00 

9,150.00 

5,820.00 

6,140.00 

7,240.00 

7,220.00 

7,415.00 

7,975.00 

500.00 

500.00 

500.00 

500.00 

500.00 

500.00 

3,450.00 

3,820.00 

3,650.00 

4,300.00 

4.720.00 

4,500.00 

11,500.00 

10,240.00 

10,350.00 

QUESTIONS  ON  AUDITING 

Question  136 — Under  what  circumstances  may  a  company  reduce  its  capital 
stock?  Assuming  a  reduction  of  capital  stock  to  have  taken  place,  what  special 
duties  would  fall  upon  you  as  auditor  on  the  occasion  of  the  first  audit  there- 
after? 


Copyright,  1919,  The  Ronald  Press  Company 


II-25-4 

Question  157 — In  the  course  of  your  audit  of  a  company  you  find  that  certain 
commissions  have  been  paid  for  underwriting  the  shares  issued  to  the  public, 
and  other  commissions  for  placing  shares.   Under  what  circumstances  would  you 
be  prepared  to  pass  these  payments  as  in  order,  and  how  would  you  vouch  them? 

Question  158 — State  how,  in  your  opinion,  the  following  items  should  be  dis- 
tributed in  the  accounts: 

(a)  Purchase  by  the  Rapid  City  R.  R.  Co.  of  locomotives,  passenger  cars, 

freight  train  cars,  and  other  equipment  of  a  value  of  $100,000 

(b)  Extraordinary  repairs  to  machinery,  tools,  and  equipment,  tending 

to  prolong  the  life  of  the  equipment,  $55,017.44 

How  would  you  audit  the  foregoing  transactions? 

Question  159 — In  the  course  of  your  audit  you  find  the  following  items  in- 
cluded under  the  heading  of  Plant  and  Machinery: 

(a)  Interest  on  bank  loans,  |5,700 

(b)  Legal  and  other  expenses  incurred  in  connection  with  acquisition 

of  certain  property,  $1,000 

(c)  Consulting  engineer's  salary,  $7,500 

If  engaged  by  the  president  of  the  company,  what  would  be  your  attitude  in 
respect  of  the  foregoing  items? 

Would  you  alter  or  modify  your  position  if  the  audit  were  being  made  on 
behalf  of  a  bond  house  which  expected  to  fund  "8.0%  of  the  cash  expenditures 
for  additions  and  betterments"? 

Question  140 — How  would  you  as  an  auditor  undertake  to  satisfy  yourself  in 
regard  to  the  correctness  of  journal  entries? 


Solution  to  Problem  50 

JOURNAL  ENTRIES  TO  OPEN  BOOKS 
OF  THE  PROGRESSIVE  MANUFACTURING  CO. 

(1) 
Preferred  Stock  Unissued  $500,000.00 

Common  Stock  Unissued  800,000.00 

To— Preferred  Stock  $500,000.00 

Common  Stock  800,000.00 

To  record  the  authorized  issue  of  capital 
stock  per  charter  granted  by  the  State 
of 


Copyright,  1919,  The  Ronald  Press  Company 


II-25-5 


(2) 
Plant  and  Equipment 
Accounts  and  Notes  Receivable 
Inventory 

Insurance  Unexpired 
Discount  Paid  in  Advance 
Cash 
Good-Will 

To — The  Martin  Manufacturing  Co., 
Vendor 
United  States  Specialty  Co.  ,  Vendor 
Brown  &  Smith,  Vendor 
Accounts  &  Notes  Payable 
Interest  Accrued 
Taxes  Accrued 
Labor  Unpaid 
Assets  acquired  and  liabilities  assumed 
in  the  acquisition  of  the  business  of 
The  Martin  Manufacturing  Co.,  United 
States  Specialty  Co.,  and  Brown  &  Smith, 
respectively,  under  the  agreements  with 


$342,500.00 

179,600.00 

153,650.00 

3,750.00 

500.00 

21,500.00 

800,000.00 


$504,600.00 

461,200.00 

334,200.00 

192,405.00 

2,070.00 

2,175.00 

4,850.00 


MARTIN 

U.S.  SPEC. 

BROWN  & 

MFG.  CO. 

CO. 

SMITH 

TOGETHER 

ASSETS 

Plant  and  Equip- 

ment 

$102,000.00 

$145,000.00 

$  95,500.00 

$ 

342,500.00 

Accounts  and 

Notes  Receiv- 

able 

62,400.00 

78,500.00 

38,700.00 

179,600.00 

Inventory 

48,500.00 

61,500.00 

43,650.00 

153,650.00 

Insurance  Un- 

expired 

1,250.00 

1,700.00 

800.00 

3,750.00 

Discount  Paid 

in  Advance 

500.00 

500.00 

Cash 

5,600.00 

7,250.00 

8,650.00 

21,500.00 

Good-Will 

322,600.00 

257,200.00 

220,200.00 

800,000.00 

$542,850.00 

$551,150.00 

$407,500.00 

$1 

,501,500.00 

Copyright,  1919,  The  Ronald  Press  Company 


II-25-6 


MARTIN  U.S.  SPEC.  BROWN  & 

MFG.  CO.  CO.  SMITH 
LIABILITIES 
Accounts  and 

Notes  Payable  $  36,100.00  $  86,075.00  $  70,230.00  $ 

Interest  Accrued   850.00  600.00 

Taxes  Accrued       750.00  825.00  1,220.00 

Labor  Unpaid       1,400.00  2,200.00  1,250.00 


TOGETHER 


192,405.00 
2,175.00 
2,070.00 
4,850.00 


$  38,250.00  $  89,950.00  $  73,300.00  $  201,500.00 
Net  Assets   504,600.00  461,200.00  334,200.00  1,300,000.00 


$542,850.00  $551,150.00  |407,500.00  $1,501,500.00 


(3) 
The  Martin  Manufacturing  Co.,  Vendor         $504,600.00 
United  States  Specialty  Co.,  Vendor  461,200.00 

Brown  &  Smith,  Vendor  334,200.00 

To — Preferred  Stock  Unissued 
Common  Stock  Unissued 
To  record  the  issue  of  preferred  and  common 
stock  to  The  Martin  Manufacturing  Co., 
United  States  Specialty  Co.,  and  Brown 
&  Smith,  respectively,  under  the  terms 
and  conditions  of  the  agreement  dated 

..,  preferred  stock  to  be 

issued  for  the  net  tangible  assets  and 
common  stock  for  the  good-will. 

COMMON  STOCK  PREFERRED  STOCK 
The  Martin  Manufactur- 
ing Co.  $322,600.00   $182,000.00   ? 
United  States  Specialty 

Co.  257,200.00    204,000.00 

Brown  &  Smith  220,200.00    114,000.00 


$500,000.00 
800,000.00 


TOGETHER 

504,600.00 

461,200.00 
334,200.00 


$800,000.00   $500,000.00   $1,300,000.00 


Copyright,  1919,  The  Ronf Id  Press  Company 


II-25-7 


THE  PROGRESSIVE  MANUFACTURING  CO. 
BALANCE  SHEET  AT  THE  COMMENCEMENT  OF  THE  BUSINESS 


ASSETS 


CAPITAL  ASSETS: 

Plant  and  Equipment 
Good-Will 

CURRENT  ASSETS: 
Inventories 

Accounts  and  Notes  Receivable 
Cash 

DEFERRED  CHARGES  TO  INCOME: 
Insurance  Unexpired 
Discount  Paid  in  Advance 


$342,500.00 
800,000.00 


$153,650.00 

179,600.00 

21,500.00 


$3,750.00 
500.00 


$1,142,500.00 


354,750.00 


4,250.00 


$1,501,500.00 


LIABILITIES 
CAPITAL  STOCK — Authorized  and  Issued: 
Preferred  Shares 
Common  Shares 

CURRENT  LIABILITIES: 

Accounts  and  Notes  Payable 
Interest  Accrued 
Taxes  Accrued 
Labor  Unpaid 


$500,000.00 
800,000.00 


$192,405.00 
2,070.00 
2,175.00 
4,850.00 


$1,300,000.00 


201,500.00 


$1,501,500.00 


Copyright,  1919,  The  Bonald  Press  Company 


II-25-8 

ENTRIES  UPON  THE  BOOKS  OF  THE  MARTIN  MANUFACTURING  CO, 

(1) 
Good-Will  $322,600.00 

To — Surplus  Account  $322,600.00 

To  set  up  the  value  of  good-will  as  arrived 
at  in  the  following  manner,  being  the 
basis  at  which  it  is  to  be  taken  over  by 
The  Progressive  Manufacturing  Co.,  under 
the  agreement  dated 

The  average  annual  earnings  for  the  last 

five  years  amounted  to  $  45,000.00 

LESS — Interest  at  7%  per  annum  on 

the  capital  investment,  viz: 
Capital  Stock       $100,000.00 
Surplus  82,000.00 


$182,000.00 


7%   thereof  is  12,740.00 


32,260.00 


Ten  times  this  amount  $322,600.00 


(2) 
The  Progressive  Manufacturing  Co.,  Vendee      504,600.00 
Accounts  and  Notes  Payable  36,100.00 

Taxes  Accrued  750.00 

Labor  Unpaid  1,400.00 

To— Good-Will  322,600.00 

Plant  and  Equipment  102,000.00 

Accounts  and  Notes  Receivable  62,400.00 

Inventory  48,500.00 

Insurance  Unexpired  1,250.00 

Discount  Paid  in  Advance  500.00 

Cash  5,600.00 

To  record  assets  sold  to  and  liabilities 
assumed  by  The  Progressive  Manufacturing 
Co.  under  bill  of  sale  dated... 


Copyright,  1919,  The  Ronald  Press  Company 


II-25-9 


(3) 
The  Progressive  Manufacturing  Co. : 

Preferred  Stock  ^182,000.00 

Common  Stock  322,600.00 

To — The  Progressive  Manufacturing  Co., 

Vendee  Account  $504,600.00 

Preferred  and  common  stock  received  in 
payment  from  The  Progressive  Manufac- 
turing Co.  for  the  net  assets  sold  to 
that  company  under  the  agreement  dated 


(4) 
Surplus  Account  404,600.00 

To—Dividend  Payable  404,600.00 

Dividend  of  404.6%  declared  to  the  stock- 
holders and  payable  in  the  stock  re- 
ceived from  the  sale  of  the  business  to 
the  Progressive  Manufacturing  Co. 

(5) 
Dividend  Payable  404,600.00 

Capital  Stock  100,000.00 

To — The  Progressive  Manufacturing  Co.: 

Preferred  Stock  182,000.00 

Common  Stock  322,600.00 

Payment  of  dividend  and  the  return  of  the 
original  capital  investment,  per  reso- 
lution adopted  by  the  board  of  directors 
at  a  meeting  held  on ,  1919. 

Similar  entries  should  be  made  on  the  books  of  the  United  States  Specialty 
Co.  and  Brown  &  Smith,  respectively,  except  that  in  the  case  of  the  partnership 
the  capital  profit  arising  from  the  sale  of  the  good-will  should  be  credited 
direct  and  in  equal  proportions  to  Brown's  and  Smith's  Capital  accounts;  in  that 
case  entry  4  (as  above)  would  not  be  required;  moreover,  the  "Dividend  Pay- 
able" feature  of  entry  5  would  be  eliminated,  but  in  all  other  respects  the 
same  entries  would  be  made. 


Cop3rright,  1919,  The  Ronald  Press  Company 


11-25-10 


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Copyright,  1919,  The  Ronald  Press  Company 


11-25-11 
ANSWERS  TO  QUESTIONS 

Answer  to  Question  126 — The  unpaid  notes  as  shown  by  the  notes  payable 
register  should  be  footed,  and  the  total  thereof  should  agree  with  the  balance 
sheet  figure.  It  would  be  advisable  to  analyze  the  Interest  Paid  Account  in  order 
to  ascertain  whether  interest  is  being  paid  on  notes  not  listed  in  the  register, 
or  whether  notes  (probably  accommodation  paper)  not  listed  were  discounted.  The 
auditor  cannot  be  held  responsible  for  notes  which  may  be  issued  without  any 
record  appearing  on  the  books  of  account,  as  for  instance,  the  issuance  of  a 
company  note  by  an  officer  who  pays  the  interest  personally,  or  has  the  interest 
check  charged  to  his  personal  account.   It  may  be  advisable  to  circularize  the 
parties  from  whom  funds  are  ordinarily  borrowed  and  to  obtain  a  certificate 
from  the  financial  officers  as  to  the  aggi  egate  amount  of  notes  outstanding.  The 
names  of  the  officers  having  authority  to  sign  notes  can  be  obtained  from  the 
minute  book. 

Answer  to  Question  127— The  auditor  should  ascertain  the  tax  period,  whether 
the  company's  method  of  accruing  taxes  is  satisfactory  as  shown  by  past  ex- 
perience, whether  any  changes  have* occurred  in  the  assessable  property  or  tax 
rate  which  would  necessitate  an  adjustment  of  the  amount  accrued  periodically 
during  the  period  under  review.  Where  the  fiscal  period  coincides  with  the  tax 
period  the  amount  of  accrued  taxes  as  shown  by  the  balance  sheet  should  repre- 
sent the  entire  tax  assessment  for  the  year.   In  some  cases  it  is  advisable  to 
write  to  the  tax  official  for  a  statement  of  the  amount  of  taxes  due  to  date, 
and  the  amount  and  rate  of  the  next  assessment. 

Answer  to  Question  128— The  procedure  to  be  followed  in  the  audit  of  the 
materials,  supplies,  and  coal  inventory  of  a  small  electric  light  company  gen- 
erating its  own  electricity  is  fairly  simple. 

1.  Obtain  the  original  inventory  sheets.   See  that  they  are  properly  in- 
itialed by  the  various  parties  taking,  pricing,  extending,  and  footing  the 
inventory.  Also  obtain  a  certificate  from  the  manager  as  to  the  correctness  of 
the  inventory  as  a  whole. 

2.  Quantities.  In  case  stores  records  are  kept  compare  the  quantities  shown 
by  the  inventory  sheets  with  such  records.  If  discrepancies  are  disclosed,  as- 
certain the  probable  cause.  In  case  the  inventory  sheets  contain  the  quantities 
shown  by  the  stores  records,  ascertain  when  the  last  physical  inventory  was 
taken  and  how  the  stores  records  were  adjusted  at  that  time.  Prepare  a  com- 
parative inventory  sheet  showing  the  quantities,  prices,  and  amounts  of  a 
representative  list  of  items. 

3.  Prices.  Cost  is  generally  adopted  as  the  price  basis.  Inasmuch  as  such 
inventories  are  held  for  use  and  not  for  sale  it  is  considered  permissible  to 
use  cost  as  the  price  basis  although  the  rule  of  cost  or  market,  whichever  is  the 
lower,  is  the  most  conservative  practice.  To  verify  the  prices  used,  compare 
same  with  the  purchase  invoices.  Calculate  the  cost  per  ton  of  coal  used,  and 
compare  same  with  the  inventory  price. 

4.  Extensions.  It  is  usually  practical  to  make  a  thorough  test  of  the 
extensions. 

5.  Footings.  It  is  usually  practicable  to  prove  the  footings  in  toto. 

Copyright,  1919,  The  Ronald  Press  Company 


11-25-12 

Answer  to  Question  129 — 

(a)  It  is  customary  to  value  inventories  of  fresh  meats  at  the  current 
market  price  irrespective  of  whether  such  price  be  more  or  less  than  cost.  The 
reason  for  this  exception  to  the  conservative  accounting  rule  of  cost  or  mar- 
ket, whichever  is  the  lower,  is  the  fact  that  such  goods  must  be  sold  within  a 
very  short  period  of  time  ;  that  the  amount  realized  therefor  will  be  the  current 
market  price,  and  any  fluctuation  thereof  will  have  a  direct  bearing  on  the 
realizable  value  of  the  inventory  when  sold  in  the  regular  course  of  trade. 
Moreover  when  the  audit  is  being  performed,  the  inventory  on  hand  at  the  close 
of  the  fiscal  period  will  in  all  probability  have  been  disposed  of,  and  the 
amount  actually  realized  on  the  sale  is  the  best  evidence  of  the  value  of  the 
inventory  for  balance  sheet  purposes. 

In  the  case  of  hams,  bacons,  canned  goods,  etc.,  the  rule  of  cost  or  market, 
whichever  is  the  lower,  is  the  most  conservative  price  basis,  although  in  actual 
practice  the  market  price  is  generally  used. 

(b)  The  prices  used  by  the  management  may  be  readily  verified  by  comparison 
with  the  public  quotation  lists  in  the  case  of  market  price,  and  with  the  latest 
invoices  in  the  case  of  cost  price.   The  estimated  selling  expense  deducted 
from  the  public  quotation  in  arriving  at  market  price  may  be  tested  by  compari- 
son with  the  actual  selling  expense  of  the  preceding  period. 

Answer  to  Question  150 — 

BONDS  may  be  classified  according  to: 

1.  The  character  of  the  issuing  corporation 

2.  The  purpose  of  the  issue 

3.  Conditions  of  payment 

4.  The  security  of  the  bond 

The  explanations  of  the  first  three  divisions  of  this  classification  are 
implied  in  the  headings  themselves,  and  they  can  be  made  as  detailed  as  any- 
one desires,  to  meet  his  need.   The  variations  included  under  (4),  however, 
require  an  explanation  of  some  of  the  more  prominent  types. 

a)  MORTGAGE  BONDS  are  secured  by  a  direct  lien  upon  property.  A  simple  cor- 
porate mortgage  is  in  no  important  respect  different  from  a  mortgage  of  an 
individual  except  that  the  indenture  is  deposited  with  a  trustee  and  the  bonds 
which  are  outstanding  are  merely  certificates  or  instruments  representing  a 
part  share  in  the  deposited  mortgage.  If  the  necessity  for  legal  action  arises, 
the  trustee  upon  a  stipulated  vote  stated  in  the  mortgage  acts  as  the  agent  for 
the  bondholders. 

There  are  several  classes  of  mortgage  bonds,  e.g.,  first  mortgage,  which 
operates  as  a  first  lien  on  the  property  securing  the  bonds;  second  mortgage, 
which  may  be  secured  by  the  same  property  but  is  subject  to  the  first  lien.  The 
important  thing  to  note  in  the  so-called  mortgage  bonds  is  that  the  lien  is 
always  upon  a  specified  property;  while  the  name  of  the  most  common  issues  will 
indicate  what  the  lien  is,  it  is  not  always  a  safe  guide.  In  such  a  case  it  must 
be  obtained  from  the  mortgage  instrument.   The  mortgage  bond  of  a  railroad,  for 
example,  .may  cover  several  different  parts  of  the  system  and  on  each  one  of 
these  parts  the  lien  may  differ. 

Copyright,  1919,  The  Ronald  Press  Company 


11-25-13 

b)  COLLATERAL  TRUST  BONDS.   Bonds  secured  by  the  deposit  of  collateral  with 
a  trustee  under  an  agreement  reciting  the  conditions  of  the  trust  are  referred 
to  as  collateral  trust  bonds.  The  collateral  usually  takes  the  form  of  stock 
and  bonds  of  either  subsidiary  companies  owned  by  the  company  issuing  the 
collateral  trust  bonds  or  the  securities  of  other  companies  purchased  as  in- 
vestments and  used  as  collateral. 

c)  DEBENTURE  BONDS.   In  finance,  the  debenture  bond  in  this  country  (but 
not  necessarily  abroad)  has  come  to  be  restricted  to  a  bond  which  is  not  secured 
by  a  lien  upon  any  specific  property.   It  is  a  general  claim  upon  all  of  the 
asset?  of  the  company,  and  all  other  mortgages  with  specific  liens  have  priority 
to  its  claims.   The  debenture  instrument  issued  today  usually  stipulates  that 
the  debenture  will  have  precedent  over  any  mortgage  issued  after  its  own  date 
of  issue.  The  most  common  types  of  debenture  issues  are  debenture  bonds,  deben- 
ture income  bonds,  preference  income  bonds,  plain  bonds,  all  civil  loans,  and 
receiver's  certificates. 

d)  INCOME  BONDS.   The  payment  of  interest  on  income  bonds  is  dependent  upon 
the  earnings  of  a  company  being  sufficiently  large  to  cover  the  amount  of  the 
interest.   The  effect,  therefore,  is  that  the  interest  on  the  bonds  operates  as 
a  first  lien  on  the  net  profits,  and  in  the  event  there  are  no  profits  the  in- 
terest on  the  bonds  is  not  a  liability  of  the  company  issuing  the  same.  Inter- 
est on  income  bonds  may,  however,  be  either  cumulative  or  non-cumulative.   The 
distinction  between  preferred  stock  and  income  bonds  is  that  in  the  latter  case 
the  principal  is  a  direct  obligation  of  the  company  and  must  be  paid  on  maturity. 
The  principal  of  income  bonds  may  be  secured  or  unsecured.   An  unsecured  deben- 
ture is  consequently  commonly  known  as  debenture  income  bondt 

REFERENCES : 

Montgomery,  pages  190-234 
Wildman,  pages  155-158;  102-107 


Copyright,  1919,  The  Ronald  Press  Company 


II-25-.15 


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11-25-16 


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Copyright,  1919,  The  Ronald  Press  Company 


II-26-1 

COMPLETE  ACCOUNTING  COURSE— PART  II 

Lecture  26 

CONTINGENT  AND  MISCELLANEOUS  LIABILITIES 


Problem  57 

You  are  required  to  point  out  (a)  errors  in  principle  and  (b)  misstatement 
of  facts  in  the  balance  sheet  and  relative  statement  of  profits  and  income  of  the 
American  Optimist  Co,  shown  below: 

THE  AMERICAN  OPTIMIST  COMPANY 
BALANCE  SHEET,  DECEMBER  31,  1918 

ASSETS 
PROPERTY  ACCOUNT  AS  AT  JANUARY  1,  1917: 

Real  Estate,  Buildings,  Plant,  Machinery, 
Equipment,  Patents,  and  Good-will,  includ- 
ing Discount  and  Commission  on  Bonds  Sold   $5,500,000.00 
ADD — Expenditures  for  Year  in  Dismantling 
Plant  at  Hoboken  and  in  Remodeling  and  Re- 
constructing Department  C,  including  all 
other  Additions  and  Extensions  775,000.00  (  6,275,000.00 


CURRENT  ASSETS: 

Stocks  and  Bonds  in  Treasury  at  par $2,000,000.00 

Investments  in  other  Companies  held  as 

Permanent  Investments  375,000.00 

Inventories  on  Hand: 

Raw  Materials  and  Supplies 

(at  cost)  $2,600,000.00 

Finished  Goods  and  Work  in 

Progress  500,000.00 

Consigned  Merchamdise 

(Selling  Values)  150,000.00   3,250,000.00 


Contracts  under  Way: 

Amount  of  Contracts       $2,500,000.00 
LESS — Estimated  Cost  to 

complete  1,000,000.00   1,500,000.00 


Accounts  and  Bills  Receivable  (Gross)         1,400,000.00 
Cash  and  other  Cash  Assets,  including  De- 
posits with  Trustee  under  Mortgage  650,000.00    9,175,000.00 


DEFERRED  CHARGES  TO  FUTURE  OPERATIONS: 

Prepaid  Interest,  Insurance,  etc.,  and  Ad- 
vertising Expenses  carried  forward  325,000.00 


$15,775,000.00 
Copyright,  1919,  The  Ronald  Press  Company 


II-26-2 

LIABILITIES 
CAPITAL  STOCK: 

50,000  Shares  of  $100  each  $  5,000,000.00 

BONDED  INDEBTEDNESS  OUTSTANDING  OR  REDEEMED  AND  HELD  BY  TRUSTEE 

(20-year  Bonds)  3,000,000.00 

CURRENT  LIABILITIES: 

Bills  Payable  $3,500,000.00 

Accounts  Payable  and  Audited  Vouchers,  in- 
cluding Pay-Rolls  and  Interest  due  but 

unpaid  750,000.00 

Taxes  Accrued  25,000.00    4,275,000.00 


RESERVE  FUNDS: 

For  Depreciation  and  Accruing  Renewals 

(Less  Expenditures)  $   50,000.00 

Bond  Sinking  Fund  400,000.00 

For  Unaudited  Bills  on  Hand  50,000.00      500,000.00 


SURPLUS : 

Balance  at  January  1,  1918  $2,500,000.00 

LESS — Adjustments  250,000.00 


$2,250,000.00 


Net  Earnings  for  Year  as  per  Statement 

attached  1,500,000.00 


$3,750,000.00 


LESS — Appropriations : 

For  Dividends  $500,000.00 
Bond  Sinking  Fund  100,000.00 

Depreciation  150,000.00      750,000.00    3,000,000.00 


$15,775,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-26-3 

THE  AMERICAN  OPTIMIST  COMPANY 
STATEAffiNT  OF  PROFITS  AND  INCOME,  YEAR  ENDING  DECEMBER  31,  1918 

GROSS  SALES  AND  CONSIGNMENTS  (excluding  Contracts)  $8,575,000.00 

Deduct — Cost  of  Sales  6,825,000.00 


BALANCE— GROSS  PROFITS  ON  GENERAL  BUSINESS  $1,750,000.00 

ADD — Profits  on  Contracts  in  Progress  275,000.00 

MISCELLANEOUS  INCOME: 

Profits  on  Bonds  Purchased  $  15,000.00 

Interest  received  on  Sundry  Investments  25,000.00 

Sundry  Items  35,000.00      75,000.00 


TOTAL  PROFITS  AND  INCOME  FROM  ALL  SOURCES  $2,100,000.00 

DEDUCT — Administration  and  Selling  Expenses         $325,000.00 
Taxes  25,000.00 

Interest  Charges  250,000.00     600,000.00 


BALANCE— NET  EARNINGS  FOR  THE  YEAR  $1,500,000.00 


Problem  58 

James  Hewson  and  Walter  Fellows  had  been  in  partnership  for  several  years, 
and  at  December  31,  1919,  desiring  to  retire,  they  entered  into  an  arrangement  to 
dispose  of  their  business  to  William  Jones,  on  the  general  terms  that  he,  Jones, 
should  take  over  everything  as  it  then  stood,  subject  to  the  following  condi- 
tions: 

1.  Inventory  of  merchandise  to  be  subject  to  a  rebate  of  6%. 

2.  Accounts  receivable  to  have  a  deduction  of  734%  to  meet  possible 

losses. 

3.  Office  furniture  to  be  subject  to  a  deduction  of  12^4%  for  depre- 

ciation. 

4.  Liabilities  to  creditors  to  be  discharged  by  February  1. 

On  the  exact  amount  required  to  be  paid  over  to  the  parties  by  Jones  being* 
ascertained,  he  was  to  pay  one-fourth  in  cash  on  February  4,  and  the  balance  by 
equal  instalments,  giving  his  notes  for  the  same  which  are  paid  in  cash  as  they 
fall  due,  dating  from  January  1,  at  three,  six,  and  nine  months,  such  instal- 
ments to  carry  interest  at  5%  per  annum. 

The  inventory  of  merchandise  in  hand  amounted  to  $21,800,  the  accounts 
receivable  to  $18,200,  and  the  office  furniture  stood  in  the  books  at  $1,250. 
The  sums  due  to  creditors  amounted  to  $6,250. 

You  are  asked,  as  representing  Jones,  to  prepare  the  ledger  accounts  as  they 
should  be  recorded  £ind  give  effect  to  the  foregoing  arrangement  in  Jones's 
ledger* 


Copyright,  1919,  The  Ronald  Press  Company 


I 1-26-4 


QUESTIONS  ON  AUDITING 

Question  141 — During  the  audit  you  are  making  of  the  accounts  of  a  corporation, 
you  become  aware  of  a  claim  against  the  company  which  you  think  is  likely  to  be 
enforced,  but  which  the  directors  do  not  recognize,  and  for  which  they  will  make 
no  reserve.  What  would  you  do  in  the  circumstances? 

Question  142 — 

(a)  Define  the  relation  between  the  directors  of  a  company  and  the  company. 

(b)  In  the  course  of  your  audit  of  a  company  you  ascertain  the  following 
facts: 

(1)  One  of  the  directors  has  sold  a  considerable  quantity  of  goods  of 

the  comp£iny. 

(2)  The  directors  have  passed  a  resolution  for  payment  to  themselves  of 

traveling  expenses  incurred  in  attending  board  meetings. 

(3)  They  have  also  passed  a  resolution  waiving  half  their  directors' 

fees  for  the  current  year. 

Do  these  points  concern  you  as  auditor,  and  if  so,  how  would  you  deal  with 
them? 

Question  145 — What  authority  would  you  require  as  auditor  for  passing  the 
remuneration  of  the  directors  of  a  company,  and  to  what  book  would  you  refer  to 
ascertain  the  names  of  the  persons  entitled  thereto? 

Question  144 — What  measures  should  be  taken  to  ascertain  whether  or  not  any 
notes  receivable  have  been  discounted  and  cleared  from  the  books,  notwithstand- 
ing the  fact  that  they  are  not  due  and  at  maturity  will  be  subject  to  demand 
on  the  last  indorser  in  case  payment  is  defaulted  by  the  maker? 

Question  145 — As  an  auditor  what  sort  of  documentary  evidence  would  you  re- 
quire in  support  of  the  following  expenditures: 

(a)  Shop  wages  paid 

(b)  Dividends  paid 

(c)  Merchandise  purchases 


Copyright,  1919,  The  Ronald  Press  Company 


II-26-5 


Solution  to  Problem  52 

The  feature  in  this  problem  appears  to  be,  that  B  in  submitting  a  statement 
to  A  did  not  prepare  a  statement  of  profit  and  loss,  but  dealt  only  with  the  re- 
ceipts from  sales  and  disbursements  for  purchases  and  expenses  represented  in 
the  advance. 


The  following  is  the  correct  statement  of  the  profits: 
PARTICULARS 


SALES 

DEDUCT — Cost  of  Sales  and  Expenses: 

Inventory  January  1 

Purchases  and  Expenses 


LESS — Inventory  December  31 

BALANCE—PROFIT 
A's  account  on  B's  books  would  appear  thus: 
DEBITS 


AMOUNT 
$350,000.00 


$  45,000.00 
284,000.00 

$329,000.00 
48,500.00 


280,500.00 


$  69,500.00 


Sale  of  Plant  $400,000.00 
Interest  on  Deferred  Pay- 
ments 18,000.00 
Interest  on  Advances  7,670.00 


CREDITS 

Cash  Received  on  Account  $100,000.00 
Profit  for  Year  69,500.00 

Balance  due  January  1: 

1919  $106,170.00 

1920  150,000.00  256,170.00 


$425,670.00 


$425,670.00 


B's  account  on  A's  books  would  appear  thus: 


DEBITS 
Cash  Paid  on  Account      $100,000.00 
Assets  taken  over  Dec.  31: 

Cash        $  88,500.00 

Inventory     48,500.00 

Accts.  Rec.    6,000.00  143,000.00 


Balcmce  due  January  1 : 

1919  $106,170.00 

1920  150,000.00  256,170.00 


$499,170.00 


CREDITS 
Sale  of  Plant 
Interest  on  Deferred  In- 
stalments 
Interest  on  Advances 
Inventory  January  1,  1918 
Accounts  Receivable  Jan- 
uary 1,  1918 


$400,000.00 

18,000.00 

7,670.00 

45,000.00 

28,500.00 


$499,170.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-26-6 

Solution  to  Problem  53 

SKELETON  JOURNAL  ENTRIES 

(1) 
Organization  Expenses  %   5,000.00 

To — Capital  Stock  $  5,000.00 

(2) 

Plotted  Tracts  50,000.00 

To — Mortgage  Payable  34,000.00 

Accounts  Payable  16,000.00 

(3) 

Plotted  Tracts  7,000.00 

To — Accounts  Payable  7,000.00 

(4) 

Dwelling  House  Account  1,200.00 

To — Plotted  Tracts  1,200.00 

(5) 

Dwelling  House  13,000.00 

To — Accounts  Payable  13,000.00 

(6) 

Accounts  Receivable  9,000.00 

To — Dwelling  House  Sales  9,000.00 

(7) 

Accounts  Receivable  30,200.00 

To — Plotted  Tracts  Sales  30,200.00 

(8) 

Accounts  Payable  4,000.00 

To — Notes  Payable  4,000.00 

(9) 

Plotted  Tract  Sales  19,800.00 

To— Plotted  Tracts  19,800.00 

(10) 
Dwelling  House  Sales  7,100.00 

To — Dwelling  House  7,100.00 

(11) 

Dwelling  House  Sales  1,900.00 

Plotted  Tract  Sales  10,400.00 

Commission  and  Fees  905.00 

•To — Profit  and  Loss  13,205.00 

Copyright,  1919,  The  Ronald  Press  Company 


II-26-7 


Profit  and  Loss 

To~Interest 
Expenses 

Profit  and  Loss 

To — Surplus 


(12) 


(IS) 


CASH  BOOK 


$  9,219.00 


3,986.00 


1,719.00 
7,500,00 


3,986.00 


RECEIPTS 
Capital  Stock 
Accounts  Receivable 
Interest 
Loan 
Commission  &  Fees 


PAYMENTS 

$25,000.00    Organization  Expenses  %       625.00 

20,075.00    Accounts  Payable  16,000.00 

750.00    Plotted  Tracts  6,000.00 

12,000.00    Accounts  Payable  1,000.00 

905.00    Accounts  Payable  7,000.00 

Mortgage  Payable  11,300.00 

Bills  Payable  3,000.00 

Interest  1,719.00 

Expenses  7,500.00 

Balance  4,586.00 

$58,730.00  $58,730.00 


Balance 


LEDGER  ACCOUNTS 

CAPITAL  STOCK 
$30,000.00    Cash 

Organization  Expenses 


$30,000.00 


$25,000.00 
5,000.00 

$30,000.00 


PLOTTED  TRACTS 


Accounts  &  Mtgs.  Payable 

Cash 

Accounts  Payable 


$50,000.00 
6,000.00 
7,000.00 

$63,000.00 


Dwelling  House 
Plotted  Tract  Sales 
Balance 


$  1,200.00 
19,800.00 
42,000.00 

$63,000.00 


Plotted  Tracts 
Accounts  Payable 


DWELLING  HOUSE 
$  1,200.00    Dwelling  House  Sales 
13,000.00    Balance 


$14,200.00 


$  7,100.00 
7,100.00 

$14,200.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-26-8 


Dwelling  House  Sales 
Plotted  Tracts  Sales 


ACCOUNTS  RECEIVABLE 
$  9,000.00    Cash 
30,200.00    Balance 


$39,200.00 


$20,075.00 
19,125.00 

$39,200.00 


Receipts 


CASH 
$58,730.00    Disbursements 
Balance 


$58,730.00 


$54,144.00 
4,586.00 

$58,730.00 


Cash 

Cash 

Cash 

Notes  Payable 

Balance 


ACCOUNTS  PAYABLE 
$16,000.00    Plotted  Tracts 


7,000.00 
1,000.00 
4,000.00 
8,000.00 

$36,000.00 


Plotted  Tracts 
Dwelling  House  Account 


$16,000.00 

7,000.00 

13,000.00 


$36,000.00 


Cash 
Balance 


MORTGAGES  PAYABLE 
$11,300.00    Plotted  Tracts 
22.700.00 


$34,000.00 


$34,000.00 


$34,000.00 


Balance 


LOAN  ACCOUNT 
$12,000.00.    Cash 


$12,000.00 


Cash 
Balance 


BILLS  PAYABLE 
$3,000.00      Accounts  Payable 
1,000.00 


$4,000.00 


$4,000.00 


$4,000.00 


Capital  Stock 
Cash 


ORGANIZATION  EXPENSES 
$5,000.00    Balance 
625.00 


$5,625.00 


$5,625,00 


$5,625.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-26-9 


Plotted  Tract 
Profit  and  Loss 


PLOTTED  TRACT  SALES 
$19,800.00    Accounts  Receivable 
10,400.00 


$30,200.00 


$30,200.00 


$30,200.00 


Dwelling  House 
Profit  and  Loss 


DWELLING  HOUSE  SALES 
$7,100.00    Accounts  Receivable 
1,900.00  • 


$9,000.00 


$9,000.00 


$9,000.00 


Profit  and  Loss 


Profit  and  Loss 


Cash 


Cash 


COMMISSIONS  &  FEES 
$905.00    Cash 


INTEREST  RECEIVED 
$750.00    Cash 


EXPENSES 
$7,500.00    Profit  and  Loss 


INTEREST  PAID 
$1,719.00    Profit  and  Loss 


$905.00 


$750.00 


$7,500.00 


$1,719.00 


Expenses 
Interest 
Surplus 


PROFIT  AND  LOSS 
$  7,500.00    Dwelling  House  Sales 
1,719.00    Plotted  Tract  Sales 
4,736.00    Commissions  and  Fees 
Interest  Received 


$13,955.00 


$  1,900.00 

10,400.00 

905.00 

750.00 

$13,955.00 


SURPLUS 

Profit  and  Loss 


$4,736.00 


Copyright,  1919,  The  Ronald  Press  Company 


11-26-10 

Exhibit  A 
LAND  DEVELOPMENT  COMPANY 
BALANCE  SHEET,  (Date) 

ASSETS  LIABILITIES 

TRACTS  AND  HOUSES  HELD  FOR  SALE:  CAPITAL  STOCK  $30,000 

Plotted  Tracts  ,.^t,™^.«^  ^.,r.T,^,, 

(at  cost)  $42,000  MORTGAGE  PAYABLE  22,700 

Dwelling  House  CURRENT  LIABILITIES: 

(at  cost).  7,100  $49,100    Bills  Payable        $  1,000 


Loans  12,000 


CURRENT  ASSETS:  Accts.  Payable         8,000  21,000 

Accounts  Receivable  $19,125  

Cash                4,586  23,711  SURPLUS: 

Surplus  Net  Profits  for 

DEFERRED  CHARGES :  period  ending 

Organization  Expenses  5,625      (Exhibit  B)                4,736 


$78,436  $78,436 


Inasmuch  as  the  tracts  are  being  disposed  of  it  would  be  desirable  to  charge 
off  part  of  the  organization  expenses,  say  about  one-third. 


Exhibit  B 


LAND  DEVELOPMENT  COMPANY 
STATEMENT  OF  PROFITS  AND  INCOME 
FOR MONTHS  ENDING 


PLOTTED  DWELLING 

TRACTS  HOUSES  TOTAL 

SALES                                     $30,200.00  $9,000.00  $39,200.00 

DEDUCT— Cost  of  Sales                   19,800.00  7,100.00  26,900.00 


GROSS  PROFIT  $10,400.00  $1,900.00  $12,300.00 


ADD—MISCELLANEOUS  INCOME: 

Commissions  and  Fees  $905.00 

Interest  Received  750.00    1,655.00 


$13,955.00 
DEDUCT — Expenses  7,500.00 


NET  PROFIT  FROM  OPERATIONS  $  6,455.00 

DEDUCT— Interest  Paid  1,719.00 


SURPLUS  NET  PROFITS  $  4,736.00 


Copyright,  1919,  The  Ronald  Press  Company 


11-26-11 
ANSWERS  TO  QUESTIONS 

Answer  to  Question  131— 

(a)  First  mortgage  5%   bonds: 

1.  Obtain  a  certificate  from  the  trustees  under  the  indenture  as  to  the 

amount  of  bonds  outstanding  at  the  date  of  the  balance  sheet  as 
shown  by  the  trustee's  records.  Reconcile  certificate  with 
general  ledger  account. 

2.  Examine  trust  deed  to  ascertain  provisions  bearing  on  the  amount  of 

bonds  which  may  be  outstanding  at  the  balance  sheet  date. 

(b)  Preferred  stock: 

1.  In  case  this  stock  is  taken  care  of  by  a  registrar  obtain  a  certifi- 

cate from  the  registrar  as  to  the  amount  of  stock  outstanding  at 
the  date  of  the  balance  sheet  as  shown  by  the  registrar's  records. 
Compare  this  certificate  with  the  general  ledger  account, 

2.  In  case  this  stock  is  taken  care  of  by  the  secretary  of  the  company, 

list  the  certificates  outstanding  as  shown  by  the  stock  certifi- 
cate book,  thus: 

NUMBER  OF      TO  WHOM      NO.  OF 
CERTIFICATE      ISSUED       SHARES      AMOUNT 

Note  whether  the  total  agrees  with  the  balance  in  the  general  ledger 
account, 

3.  Note  whether  any  blank  certificates  are  missing. 

4.  See  that  all  canceled  certificates  are  pasted  to  the  corresponding 

stubs. 

5.  If  the  procedure  outlined  in  (2)  is  not  deemed  to  be  a  sufficient 

verification,  take  off  a  trial  balance  of  the  stock  ledger.  The 
total  shown  by  the  trial  balance  should  agree  with  the  total  of 
the  schedule  of  stock  certificates,  and  with  the  balance  shown  by 
the  Preferred  Stock  account  in  the  general  ledger. 

Answer  to  Question  132 — The  effect  of  this  treatment  in  the  accounts  is  to 
understate  the  asset  of  materials  and  supplies  and  per  contra  the  liability 
of  audited  vouchers  payable.   At  the  close  of  the  fiscal  period  an  entry  should 
be  introduced  charging  Materials  find  Supplies  and  crediting  Unaudited  Invoices, 
Inasmuch  as  the  liability  exists  at  the  balance  sheet  date  it  must  be  reflected 
on  the  balance  sheet  before  the  true  financial  condition  can  be  stated.  In  case 
the  amount  involved  is  insignificant,  the  auditor  may  ignore  same  if  in  his 
opinion  it  would  not  affect  the  financial  condition  of  the  company. 


Copyright,  1919,  The  Ronald  Press  Company 


11-26-12 

Answer  to  Question  135 — The  records  of  the  transactions  would  be  as  follows; 

JOURNAL 

(1) 
Unissued  First  Mortgage  4%  Bonds  $50,000.00 

To — First  Mortgage  4%  Bonds  $50,000.00 

To  record  the  authorized  issue  of  100  first 
mortgage  4%  bonds  as  per  resolution 
adopted  by  stockholders  at  a  meeting 
held  on. .  • ,  • 

(2)   . 

Discount  on  Bonds  2,000.00 

To — Unissued  First  Mortgage  4%  Bonds  2,000.00 

To  record  discount  allowed  on  sale  of  100 
bonds  of  $500  each. 

CASH  BOOK  ENTRY 
Cash  $48,000.00 

To — Unissued  First  Mortgage  4%  Bonds  $48,000.00 

To  record  proceeds  from  sale  of  100  first 
mortgage  4%  bonds,  par  value  $500  each. 


Answer  to  Question  134 — 

(a)  DISCOUNT  ON  BONDS  OR  STOCK 

(1)  Bond  discount.  It  is  now  generally  recognized  that  discount  on  bonds  is 
an  addition  to  the  nominal  rate  of  interest  paid  and  as  such  should  be  spread 
over  the  term  of  the  bonds.   The  proportion  pertaining  to  the  period  of  con- 
struction is  admitted  as  a  proper  charge  against  the  cost  of  construction  of  a 
plant . 

The  amount  of  the  discount  would  be  charged  to  a  Discount  on  Bonds  account, 
which  should  be  relieved  from  time  to  time  with  the  credits  in  respect  of  the 
proportion  chargeable  to  either  (a)  Profit  and  Loss  account  or  (b)  Construc- 
tion account,  as  the  case  may  be. 

(2)  Discount  on  Stock.  The  question  arises  first  of  all  as  to  whether  or  not 
stock  (at  least  in  most  states)  can  be  sold  at  a  discount.  In  the  event  it  is 
done,  the  amount  of  discount  should  be  charged  to  a  Discount  on  Stock  account 
and  so  shown  on  the  face  of  the  balance  sheet. 

(b)  PREMIUM  ON  STOCK  OR  BONDS 

(1)  Premiums  on  bonds.  Premiums  on  bonds  are  the  reverse  of  discounts  on 
bonds.   The  premium  when  received  should  be  credited  to  a  Bond  Premiums  account 
to  be  spread  over  the  term  of  the  bonds  and  applied  in  reduction  of  the  nominal 
rate  of  interest  paid.   Periodically  bond  premiums  should  be  charged  with  the 
proportion  of  the  premium  applicable  to  that  period,  the  contra  credit  being 
made  to:  (a)  Profit  and  Loss  account  or  (b)  Property  or  Construction  account, 
as  the  case  may  be. 

Copyright,  1919,  The  Ronald  Press  Company 


11-26-13 

(2)  Premiums  on  stock.  The  amount  received  over  and  above  the  par  value  of 
the  shares  should  be  credited  to  Premium  on  Stock  account  or  Capital  Surplus 
account.   The  latter  term  is  used  to  differentiate  same  from  surplus  arising 
from  the  regular  operations  of  the  concern. 

(c)  BONUS  COMMON  STOCK.  In  this  case  the  common  stock  was  issued  as  a  bonus 
with  the  sale  of  preferred  stock.  It  should  be  charged  to  Common  Stock  Bonus  ac- 
count, being  in  effect  a  discount  on  the  preferred  stock.  Frequently,  however, 
bonuses  are  regarded  as  organization  expenses  and  so  dealt  with. 

To  audit  the  discount  or  premiums  on  bonds,  obtain  the  periodical  reports  of 
the  bankers  handling  the  bond  issue.  These  reports  indicate  the  amount  of  bonds 
sold,  when  sold,  and  the  discount  or  premium  arising  from  the  sale.  Verify  the 
amount  of  discount  or  premium  unamortized  and  note  whether  the  amortized  dis- 
count or  premium  has  been  properly  dealt  with  as  between: 

1.  Current  Profit  and  Loss  account 

2.  Surplus 

3.  Property  or  Construction 

It  would  be  advisable  to  examine  the  minute  book  for  resolutions  bearing  on  the 
terms  on  which  bonds  should  be  sold.   There  will  probably  be  a  contract  between 
the  bankers  and  the  company  outlining  the  terms  of  the  sale. 

In  the  audit  of  discount  on  stock,  premium  on  stock,  and  bonus  common  stock, 
examine  the  minute  book  for  resolutions  bearing  on  the  terms  upon  which  each 
class  of  stock  should  be  sold.   Check  the  various  stock  transactions  to  ascer- 
tain whether  the  proper  premium  was  received,  and  whether  the  allowances  for 
stock  discount  and  the  amount  of  bonus  common  stock  are  correct. 

Answer  to  Question  155 — Receipts  for  payments  on  account  of  subscription 
should  be  written  up  in  duplicate  and  the  receipt  book  numbered  consecutively  in 
advance.  When  receipts  are  issued  the  original  is  given  to  the  subscriber  and 
the  duplicate  surrendered  to  the  office.   Broadly  speaking,  the  scheme  of  book- 
keeping would  be  as  follows: 

1.  General  ledger,  in  which  all  asset,  liability,  income,  and  expense 

accounts  would  be  kept. 

2.  General  cash  book,  arranged  in  columnar  form  in  order  to  facilitate 

posting. 

3.  Record  of  audited  vouchers. 

4.  General  Journal. 

All  checks  should  be  signed  and  countersigned j  all  receipts  deposited  in- 
tact, and  a  petty  cash  fund  established.  In  addition,  regular  financial  state- 
fljents  should  be  prepared,  setting  forth  the  results  from  operation  and  the 
financial  position  of  the  institution. 

To  guard  as  far  as  possible  against  the  collection  and  withholding  of  funds 
by  the  collector  through  the  use  of  a  receipt  other  than  the  official  form,  it 
is  advisable  to  publish  in  the  annual  report  a  list  of  subscribers  and  donors 
showing  the  amount  of  each  subscription  and  donation.   This  annual  report 
should  be  mailed  to  every  contributor.  But  oftentimes  it  will  be  found  that 
some  contributors  will  object  to  publication  of  their  names  and  contributions. 

Copyright,  1919,  The  Ronald  Press  Company 


11-26-14 

Consequently  it  is  difficult  to  ascertain  whether  an  item  has  been  properly  or 
improperly  omitted,  because  the  amounts  involved  are  usually  the  same. 

REFERENCES : 

Montgomery,  pages  168-181 ;  185-190 
Wildman,  pages  61-65;  48-58 


Copyright,  1919,  The  Ronald  Press  Company 


11-26-15 


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Copyright,  1919,  The  Ronald  Press  Company 


II-27-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 

Lecture  27 

CONSOLIDATED  BALANCE  SHEET 


Problem  59 

The  Central  Manufacturing  Co.  has  owned  the  controlling  interest  in  John 
Doe  &  Co.  and  Richard  Roe  &  Co.  since  the  subsidiaries  were  organized.  From 
the  balance  sheets  of  the  respective  companies  given  below  prepare  a  consoli- 
dated balance  sheet.  Attach  thereto  your  working  papers  showing  how  the  con- 
solidated balance  sheet  figures  were  arrived  at. 

JOHN  DOE  &  CO. 
BALANCE  SHEET,  APRIL  1,  1919 


ASSETS 


LIABILITIES 


CAPITAL  ASSETS: 


Plant  and  Equipment 


CAPITAL  STOCK: 
$  50,000    750  shares  at  $100 


$  75,000 


CURRENT  ASSETS: 
Inventories 
Advance  to  Richard 

Roe  k   Co. 
Customers 
Cash 

$30,000 

3,500 

25,000 

5,000 

63, 

,500 

CURRENT  LIABILITIES: 
Accounts  Payable 
Notes  Payable — 

Central  Mfg.  Co. 
Dividends  Payable 

$27,000 

8,500 
3,000 

38,500 

$113, 

,500 

$113,500 

RICHARD  ROE  k   CO. 
BALANCE  SHEET,  APRIL  1,  1919 


ASSETS 


LIABILITIES 


CAPITAL  ASSETS: 

CAPITAL  STOCK: 

Plant  &  Equipment 

1 

97, 

,500 

1,250  shares  at  $100 

CURRENT  ASSETS: 

CURRENT  LIABILITIES: 

Inventories 

$47,400 

Accounts  Payable 

Customers 

25,000 

Advances  from 

Advances  to  Central 

John  Doe  &  Co. 

Mfg.  Co. 

7,500 

Cash 

3.850 

83, 

,750 

SURPLUS 

$181, 

,250 

^*' 

$125,000 


$46,500 


3,500   50,000 


6,250 


$181,250 


Copyright,  1919,  The  Ronald  Press  Company 


I 1-27-2 


CENTRAL  MANUFACTURING  COMPANY 
BALANCE  SHEET,  APRIL  1,  1919 


ASSETS 
CAPITAL  ASSETS: 
Investment  in  the 
Capital  Stock  of 
John  Doe  &  Co. , 
750  shares  at 
$100 

Investment  in  the 
Capital  Stock  of 
Richard  Roe  &  Co. , 
1,000  shares  at 
$100 


$100,000 


90,000  $190,000 


LIABILITIES 
CAPITAL  STOCK: 

2,500  shares  at  $100 
CURRENT  LIABILITIES: 
Advances  from  Richard 
Roe  &  Co. 
SURPLUS 


$250,000 


7,500 
3,000 


CURRENT  ASSETS: 

Notes  Receivable  of 

Richard  Roe  &  Co.  $  8,500 

Dividends  Receivable   3,000 

Cash               59,000 

70,500 

$260,500 

. 

$260,500 


Copyright,  1919,  The  Ronald  Press  Company 


II-27-3 

Problem  60 

From  the  following  comparative  balance  sheets  at  December  31,  1918,  and 
June  30,  1919,  prepare  statement  showing  the  chemge  in  the  financial  condition 
of  the  C  D  Company  between  those  dates: 

ASSETS 

DEC.  31,  1918  JUNE  30,  1919 

Plant  and  Equipment                              $310,000.00  $375,000.00 

LESS — Reserve  for  Depreciation        '          90,000.00  100,000.00 


Investment  in: 


Current  Assets: 


$220,000.00   $275,000.00 


X  Y  Z  Company  $  62,000.00   — 

P  Q  Company  120,000.00   $148,000.00 


$182,000.00   $148,000.00 


Inventories  $138,000.00  $  96,200.00 

Customers*  Accounts  less  Reserve  for 

Bad  Debts  and  Discounts  31,200.00  89,700.00 

Officers  and  Employees  6,200.00  4,050.00 

Cash  7,400.00  14,500.00 


$182,800.00   $204,450.00 


Deferred  Charges  (2)  $  4,800.00   $  8,550.00 


$589,600.00   $636,000.00 


LIABILITIES 
Capital  Stock  $  50,000.00   $  50,000.00 


First  Mortgage  Q%   Gold  Bonds  due  1929  (1)  $100,000.00 


Purchase  Money  Obligation  $  12,500.00  $  12,500.00 

Current  Liabilities:  

Notes  Payable  $146,000.00  $  19,400.00 

Audited  Vouchers  39,000.00  53,000.00 

Other  Accounts  Payable  3,300.00  3,800.00 


$188,300.00   $  76,200.00 


Surplus  $338,800.00   $397,300.00 


$589,600.00   $636,000.00 


NOTES— 

(1)  The  Q%   bonds  were  sold  for  cash  at  91. 

(2)  Bond  discount  $9,000,  less  $450  charged  off  during  six  months 

ending  June  30,  1919. 

Copyright,  1919,  The  Ronald  Press  Company 


II-27-4 

Problem  61 

On  January  1,  1919,  X  Y  Z  Co.  acquired  the  entire  capital  stock  of  the 
P  Q  Co.,  consisting  of  1,000  shares  of  a  par  value  of  $100  each,  for  which  was 
paid  the  sum  of  $150,000.  After  the  transaction  was  recorded  on  the  books  of 
the  X  Y  Z  Co.  the  balance  sheets  of  the  two  companies  were  as  follows: 

ASSETS  X  Y  Z  COMPANY              P  Q  COMPANY 

Real  Estate  $  50,000.00              $  25,000.00 

Building,  Plant,  &  Equipment   75,000.00  45,000.00 

Good-Will  25,000.00 

Investment  in  P  Q  Company  150,000.00 

Inventories  80,000.00  20,000.00 

Accounts  Receivable  *60,000.00  70,000.00 

Cash  10,000.00  15,000.00 

LIABILITIES 

Accounts  Payable  $  50,000.00              *$50,000.00 

Loans  50,000.00 

Capital  Stock  250,000.00               100,000.00 

Surplus  100,000.00                25,000.00 


$450,000.00  $450,000.00    $175,000.00  $175,000.00 


♦Includes  account  of  $15,000  due  by  P  Q  Co.  to  X  Y  Z  Co. 

Prepare  a  consolidated  balance  sheet  attaching  thereto  the  working  sheets 
used. 

QUESTIONS  ON  AUDITING 

Question  146-147— How  would  you  vouch  the  following  items  appearing  in  the 
books  of  a  company  you  are  auditing;  and  state  specifically  the  papers  or 
documents  you  would  call  for  in  support  of  the  disbursement: 

(a)  The  Rapid  Typewriter  Co. 

Typewriter  purchased  in  exchange  for  old  one         $    30.00 

(b)  Alex.  Greene 

Real  Estate  for  plant  site  7,500.00 

(c)  Automatic  Sprinkler  Co. 

Instalment  paid  on  sprinkler  system  1,000.00 

(d)  John  Mace 

Stumpage  purchased  for  625.00 

(e)  Safety  Trust  Co. 

Par  value  $3,000  bonds  2,970.00 

(f)  Machinery  constructed  and  erected  by  the  company's  staff     10,500.00 

(g)  John  Jones,  Salesman 

Traveling  expenses  for  week  73.20 

(h)  A  B  Company 

Note  payable  discounted  987.50 

Copyright,  1919,  The  Ronald  Press  Company 


II-27-5 

Question  148 — How  would  you  guard  against  using  a  voucher  twice  for  the 
payment  of  money? 

Question  149 — In  the  verification  of  cash  disbursements  what  sort  of 
evidence  would  you  require?  Moreover,  would  you  regard  it  sufficient  to  ac- 
cept the  regular  bank  statement  or  passbook  in  support  of  the  balance  in  bank 
at  the  date  of  the  verification? 

Question  150 — What  courses  should  an  auditor  pursue  in  order  to  verify  the 
correctness  of  the  following  items: 

(a)  Allowances  made  to  customers 

(b)  Calls  in  arrear 


Solution  to  Problem  54 


Exhibit  A 


EDWARDS  MANUFACTURING  COMPANY 
BALANCE  SHEET,  DECEMBER  31,  1918 


ASSETS 


CAPITAL  ASSETS: 
Real  Estate 
Buildings 

Machinery  and  Equipment 
Tools  and  Running  Gear 


Reserve  for 
Cost  Value  Depreciation 


\   23,500.00 

133,127.11 

64,133.34 

13,113.78 


3,328.18 
6,413.33 
1,311.38 


Book 
Value 

$  23,500.00 

129,798.93 

57,720.01 

11,802.40 


3233,874.23  $11,052.89  $222,821.34 


CURRENT  ASSETS: 
Inventories: 

Raw  Materials  $24,308.14 
In  Process  33,987.32 
Finished 

Product      40,398.50 


Customers*  Accounts 
Notes  Receivable 
Sundry  Debtors 
Cash: 

With  Fiscal 

Agents       $3,425.00 

Banks  6,908.73 


DEFERRED  CHARGES: 

Insurance  Unexpired 


$98,693.96 

93,183.27 

19,422.03 

1,378.34 


10,333.73 


$223,011.33 


450.00 


$446,282.67 


Copyright,  1919,  The  Ronald  Press  Company 


LIABILITIES 


II-27-6 

CAPITAL  STOCK: 

Preferred  Stock 
Common  Stock 


FIRST  MORTGAGE  6%  BONDS 
CURRENT  LIABILITIES: 

Notes  Payable 

Trade  Creditors 

Matured  Interest  Coupons 

Accrued  Interest  on  Bonds  and  Notes 

Accrued  Taxes 

Accrued  Wages 
SURPLUS  ACCOUNT: 

Balance  at  January  1,  1918 


$100,000.00 
125,000.00 


$  45,670.00 

33,198.34 

3,425.00 

1,125.00 

2,234.83 

13,134.87 

$  42,493.98 


$225,000.00 


100,000.00 


98,788.04 


LESS — Net  Loss  year  ended  Dec.  31,  1918  (Exhibit  B)   19,999.35    22,494.63 


EDWARDS  MANUFACTURING  COMPANY 

STATEMENTS  OF  PROFITS  AND  INCOME 

YEAR  ENDING  DECEMBER  31,  1918 

GROSS  SALES 

Deduct — Discounts  on  Sales 
Freight  Outward 
Allowances 

NET  PROCEEDS  FROM  SALES 
Cost  of  Goods  Sold  (Exhibit  C) 

GROSS  PROFITS  FROM  OPERATION 
ADD — Other  Income — Discount  on  Purchases 

TOTAL  PROFITS  AND  INCOME  FROM  ALL  SOURCES 
DEDUCT— SELLING  AND  GENERAL  EXPENSES: 
Selling  Expenses : 

Salesmen's  Salaries  and  Commissions  $10,375.50 

Insurance 

Bad  Debts 

Traveling  Expenses 
General  Expenses: 

Officers'  Salaries 

Traveling  Expenses 


$18,343.11 
12,397.50 
11,832.50 


1,000.00 
937.11 
3,983.21  $16,295.82 

$11,500.00 

1,983.50   13,483.50 


NET  LOSS  FROM  OPERATIONS 
ADD~Interest  on  Bonds  and  Bills  Payable 

TOTAL  LOSS — Carried  to  Surplus  Account  (Exhibit  A) 
Copyright,  1919,  The  Ronald  Press  Company 


$446,282.67 
Exhibit  B 

$583,111.37 

42,673.11 

$540,538.26 
523,353.90 

$  17,184.36 
3,118.93 

$  20,303.29 


29,779.32 

$  9,476.03 
10,523.32 

$  19,999.35 


EDWARDS  MANUFACTURING  COMPANY 
STATEMENT  OF  COST  OF  PRODUCTION  AND  GOODS  SOLD 
FOR  YEAR  ENDING  DECEMBER  31,  1918 

MATERIALS  USED: 

Inventory  of  Raw  Materials  at  January  1,  1918     $  23,083.27 

Purchases  284,311.93 

Freight  Inward  19,067.27 


II-27-7 

Exhibit  C 


$326,462.47 
Less — Inventory  of  Raw  Materials  at  Dec.  31,  1918   24,308.14 


WAGES 

INDIRECT  FACTORY  EXPENSES: 

Superintendent • s  Salary 

Taxes 

Insurance 

Light,  Heat,  and  Power 

Royalties 

Repairs  and  Maintenance 

Depreciation  on: 
Buildings 

Machinery  and  Equipment 
Tools  and  Running  Gear 

Miscellaneous  Factory  Expenses 


$3,328.18 
6,413.33 
1,311.38 


DEDUCT— INCREASE  IN  INVENTORY  OF  WORK  IN  PROCESS; 
Inventory  at  January  1,  1918 
Inventory  at  December  31,  1918 

COST  OF  FINISHED  GOODS  PRODUCED 
ADD— DECREASE  IN  INVENTORY  OF  FINISHED  GOODS: 
Inventory  at  January  1,  1918 
Inventory  at  December  31,  1918 

COST  OF  GOODS  SOLD  (Exhibit  B) 


2,400.00 
2,234.83 
1,000.00 
2,483.11 
3,307.50 
19,083.27 


11,052.89 


3,350.31 


$  10,100.00 
33,987.32 


$  78,111.30 
40,398.50 


$302,154.33 
162,462.18 


44,911.91 

$509,528.43 

23,887.32 
$485,641.10 

37,712.80 
$523,353.90 


Copyright,  1919,  The  Ronald  Press  Company 


II-27-8 

Solution  to  Problem  55 

V  JOHN  DOE 

BALANCE  SHEET,  DECEMBER  31,  1918 

'  ASSETS 
CAPITAL  ASSETS: 

Plant  and  Machinery  $10,000.00 

LESS— Reserve  for  Depreciation       1,000.00  ?  9,000.00 


Furniture  and  Fixtures  (   700.00 

LESS— Reserve  for  Depreciation         35.00     665.00  $  9,665.00 


CURRENT  ASSETS: 

Inventory  of  Merchandise  $  9,500.00 

Accounts  Receivable  $44,000.00 

LESS — Reserve  for  Bad  Debts  2,200.00   41,800.00 


Cash: 

In  Bank  $  2,000.00 

On  Hand  50.00    2,050.00   53,350.00 


$63,015.00 


LIABILITIES  AND  CAPITAL 
JOHN  DOE— CAPITAL: 

Balance  at  January  1,  1918  $34,500.00 

ADD— Investment  2,500.00 

Interest  on  Capital  1,725.00 

Profit  for  year  16,040.00 


$54,765.00 
DEDUCT— Withdrawals  1,500.00 


Balance  at  December  31,  1918  $53,265.00 

CURRENT  LIABILITIES: 

Accounts  Payable  9,750.00 


$63,015.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-27-9 


JOHN  DOE 
PROFIT  AND  LOSS  ACCOUNT 
FOR  YEAR  ENDING  DECEMBER  31,  1918 


Inventory  at  January  1,  1918  $  8,500.00 


Purchases 

Wages 

Depreciation  of: 

Plant  and  Machinery 
Furniture  and  Fixtures 

Bad  Debts 

General  Expense 

Net  Profit  from  Operation 


14,750.00 
7,750.00 

1,000.00 

35.00 

2,200.00 

5,000.00 

17,765.00 

$57,000.00 


Sales 

Inventory  at  December  31, 
1918 


$47,500.00 
9,500.00 


$57,000.00 


5%  Interest  on  Capital  at 

January  1,  1918 
Surplus  Net  Profit 


$  1,725.00 
16,040.00 

$17,765.00 


Net  Profit  from  Operation   $17,765.00 


$17,765.00 


Comments  on  Problem  55 

1.  This  is  a  simple  problem  in  single-entry  bookkeeping.  The  two  points 
involved  are  the  ascertainment  of  the  sales  and  purchases  for  the  period. 
This  is  done  by  building  up  the  Accounts  Receivable  and  Accounts  Payable 
accounts  from  the  information  given,  viz. ; 


Jan.  1  Balance 
Sales 


ACCOUNTS  RECEIVABLE 
$26,500.00  Dec.  31  Balance 
47,500.00  Cash 


$74,000.00 


$44,000.00 
30.000.00 

$74,000.00 


Deo.  31  Balance 
Cash 


ACCOUNTS  PAYABLE 
$  9,750.00  Jan.   1  Balance 
12,500.00  Purchases 


$22,250.00 


$  7,500.00 
14,750.00 

$22,250.00 


2.  Five  per  cent  is  to  be  provided  for  bad  debt  reserve.  Whether  this  is 
to  be  calculated  on  the  sales  or  the  outstanding  accounts  is  not  clear.   The 
latter  method  would  appear  to  be  preferable  under  the  circumstances. 

3.  The  Profit  and  Loss  account  brings  out  the  method  of  stating  interest 
on  capital,  which  is  not  an  expense,  but  only  a  method  of  dividing  profits. 


Copyright,  1919,  The  Ronald  Press  Company 


11-27-10 

Solution  to  Problem  56 


Balance,  July  1,  1918: 

Debtors  |5,820.00 
Petty  Cash  .  500.00 
Stock  3,450.00  $  9,770.00 


NEW  YORK—CURRENT  ACCOUNT 
Cash 


$17,100.00 


Rents  and  Taxes 
Salaries  and  Wages 
Goods  from  Factory 
Net  Profit 


200.00 

1,650.00 

11,500.00 

6.000.00 

$29,120.00 


Balance,  December  31,  1918: 


Debtors 
Petty  Cash 
Stock 


^7,220.00 
500.00 
4,300.00  12,020.00 


$29,120.00 


SAN  FRANCISCO— CURRENT  ACCOUNT 


Balance,  July  1,  1918: 

Debtors  $6,140.00 
Petty  Cash  500.00 
Stock  3,820.00  $10,460.00 


Rents  and  Taxes 
Salaries  and  Wages 
Goods  from  Factory 
Net  Profit 


175.00 

1,520.00 

10,240.00 

5,880.00 

$28,275.00 


Cash  $15,640.00 

Balance,  December  31,  1918: 


Debtors 
Petty  Cash 
Stock 


$7,415.00 
500.00 
4,720.00  12,635.00 


$28,275.00 


MONTREAL— CURRENT  ACCOUNT 


Balance,  July  1,  1918: 

Debtors  $7,240.00 
Petty  Cash  500.00 
Stock  3,650.00  $11,390.00 


Rents  and  Taxes 
Salaries  and  Wages 
Goods  from  Factory 
Net  Profit 


75.00 

1,600.00 

10,350.00 

4,810.00 

$28,225.00 


Cash  $15,250.00 

Balance,  December  31,  1918: 

Debtors         $7,975.00 

Petty  Cash        500.00 

Stock  4,500.00  12,975.00 


$28,225.00 


Copyright,  1919,  The  Ronald  Press  Company 


11-27-12 


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Copyright,  1919,  The  Ronald  Press  Company 


11-27-13 


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Copyright,  1919,  The  Ronald  Press  Company 


11-27-14 


A  COMPANY 

STATEMENT  OF  PROFIT  AND  LOSS 

FOR  SIX  MONTHS  ENDING  DECEMBER  31,  1918 


TOTAL 


NEW  YORK  SAN  FRANCISCO  MONTREAL 


SALES: 

On  Account 
Cash 

TOTAL  SALES 
LESS — Returned  Sales  and 
Allowances 

NET  SALES 

COST  OF  SALES: 

Inventory  at  July  1,  1918 
Goods  from  Factory 


LESS — Inventory  at  December 
31,  1918 


$34,525,00  $12,500.00  '$11,800.00 
17,730.00    6,250.00  ,  5,380.00 


$52,255.00  $18,750.00  $17,180.00 
670.00.     250.00      140.00 


$10,225.00 
6,100.00 

$16,325.00 

280.00 


$51,585.00  $18,500.00  $17,040.00  $16,045.00 


,920.00  $  3,450.00  $  3,820.00 
32,090.00   11,500.00   10,240.00 


$43,010.00  $14,950.00  $14,060.00 
13,520.00    4,300.00    4,720.00 


$  3,650.00 
10,350.00 

$14,000.00 

4,500.00 


$29,490.00  $10,650.00  $  9,340.00  $  9,500.00 


GROSS  PROFIT  FROM  SALES    $22,095.00  $7,850.00  $7,700.00  $6,545.00 


DEDUCT—EXPENSES: 
Salaries  and  Wages 
Rents  and  Taxes 
Bad  Debts 

TOTAL  EXPENSES 

NET  PROFIT 


$  4,770.00  $  1,650.00  $  1,520.00 
450.00  200.00  175.00 
185.00      125.00 


$  1,600.00 
75.00 
60.00 


$  5,405.00  $  1,850.00  $  1,820.00  $  1,735.00 


$16,690.00  $  6,000.00  $  5,880.00  $  4,810.00 


ANSWERS  TO  QUESTIONS 

Answer  to  Question  136— Where  the  company  is  acting  under  a  special  resolu- 
tion, the  auditor  should  examine  same  and  ascertain  that  it  is  in  order.  The 
auditor  should  also  see  that  the  statutory  provisions  have  been  complied  with. 
This  will  enable  him  to  vouch  the  necessary  journal  entries  recording  the 
alteration  or  reduction  of  the  capital. 

Where  the  scheme  involves  an  alteration  in  the  number  of  shares  held  by 
each  shareholder,  or  in  the  nominal  amount  of  such  shares,  or  the  conversion 
of  one  class  of  shares  into  another  class,  the  auditor  should  check  the  neces- 
sary entries  ;  and  where  new  share  ledgers  have  been  opened,  he  should  ascertain 
that  each  shareholder  is  duly  credited  with  the  amounts  to  which  he  is  entitled. 
All  canceled  certificates  should  be  inspected. 


Copyright,  1919,  The  Ronald  Press  Company 


11-27-15 

Answer  to  Question  137 — From  the  minute  book  ascertain  the  authority  upon 
which  the  commissions  are  being  paid  and  the  rate  thereof,  audit  the  voucher 
check  in  the  usual  manner,  giving  especial  attention  to  the  accuracy  of  the 
commission  calculation.  Note  whether  the  vouchers  are  approved  by  someone 
f&miliar  with  the  commission  contracts. 

Answer  to  Question  138 — 

(a)  Purchases  of  additional  equipment,  being  extensions  to  existing  proper- 
ties, represent  legitimate  charges  to  capital  asset  accounts.  Therefore,  the 
expenditure  of  §100,000  for  locomotives,  passenger  cars,  freight  train  cars, 
and  other  equipment  is  a  proper  capital  addition.  If  this  equipment  were  pur- 
chased to  replace  other  equipment  the  necessary  entries  in  respect  of  the  book 
or  record  value  of  the  equipment  sold,  destroyed,  or  dismantled  should  be  made 
to  relieve  the  property  accounts  and  per  contra  debit  the  depreciation  reserve 
account. 

(b)  The  description  of  the  expenditure  clearly  indicates  that  it  was  of  an 
extraordinary  nature  and  tended  to  prolong  the  life  of  the  equipment  against 
which  provision  for  the  accrued  depreciation  had  been  made.   In  other  words, 
this  expenditure  tended  to  make  good  or  arrest  depreciation  and  therefore  is  a 
proper  charge  against  the  depreciation  reserve  that  had  been  created  for  this 
purpose. 

The  auditor  should  examine  the  vouchers  supporting  the  purchase  of  equip- 
ment.  These  vouchers  should  be  examined  as  to  authority  and  clerical  accuracy. 
Assuming  the  concern  made  its  own  repairs,  it  will  be  necessary  to  verify  the 
material  and  labor  charges  from  the  stores  requisitions  and  pay-rolls.   If 
burden  has  been  added  to  prime  cost  it  is  especially  important  to  inquire  into 
the  basis  upon  which  such  burden  has  been  added  with  the  view  of  ascertaining 
whether  an  excessive  £imount  has  been  charged. 

Answer  to  Question  139 — 

(a)  Interest  on  bank  loans,  $3,700.  If  the  moneys  were  borrowed  for  cur- 
rent working  capital  requirements  of  the  business  in  connection  with  the  manu- 
facture and  sale  of  its  product,  the  expenditure  would  be  a  charge  against  the 
Profit  and  Loss  account  of  the  period.  If  the  moneys  were  raised  for  the  pur- 
pose of  meeting  payments  in  connection  with  construction  work  and  represented 
interest  on  the  loans  during  the  period  of  construction,  the  expenditure  would 
be  a  proper  charge  against  the  capital  asset  or  property  accounts. 

(b)  Legal  and  other  expenses,  $1,000,  incurred  directly  in  connection  with 
the  acquisition  of  certain  property  would  be  a  proper  charge  against  the  capital 
asset  accounts,  being,  as  it  is,  a  part  of  the  cost  of  acquiring  the  property. 

(c)  Consulting  engineer's  salary  $7,500.   There  is  not  sufficient  informa- 
tion given  in  the  question  to  enable  one  to  determine  whether  or  not  the  ex- 
penditure should  be  charged  against  capital  or  revenue.  The  whole  question  is, 
■On  what  kind  of  work  did  the  engineer  spend  his  time,  i.e.,  in  connection  with 
additions  and  extensions  to  property  or  in  the  repair  and  upkeep  of  the  prop- 
erty?" In  the  first-named  case  the  charge  would  be  against  capital  asset  ac- 

Copyright,  1919,  The  Ronald  Press  Company 


11-27-16 

counts,  and  in  the  last-named  case  the  charge  would  be  against  the  Maintenemce 
or  Repair  Expense  account,  or,  in  other  words,  against  the  Profit  and  Loss 
account  of  the  current  period.   It  may  be  that  part  of  his  time  was  spent  on 
construction  work  and  part  on  repair  and  upkeep  work.   In  this  case  the  charge 
would  have  to  be  apportioned  between  the  two  accounts. 

It  appears  under  the  provisions  of  the  trust  deed  that  80%  of  the  cash 
expenditures  for  additions  and  betterments  are  fundable.  Consequently  in 
either  case,  the  auditor  must  ascertain; 

1.  Whether  the  items  in  question  constitute  proper  charges  to  additions 

and  betterments. 

2,  Whether  they  have  been  paid  for  in  cash  inasmuch  as  cash  expendi- 

tures only  are  fundable. 

Answer  to  Question  140 — Journal  entries  should  be  supported  by  a  journal 
voucher  properly  approved.,  Documentary  evidence  supporting  each  entry  and 
showing  an  approval  of  the  transaction  by  an  official  should  be  called  for  even 
though  formal  journal  vouchers  are  not  used. 


HOLDING  COMPANIES 

EARLY  HOLDING  COMPANIES— 

1.  SPECIAL  CHARTER  COMPANIES 

Pennsylvania  Company — 1870,  by  Pennsylvania 
American  Bell  Telephone  Co. — 1880,  by  Massachusetts 

'2.  GENERAL  LAWS 

First  enacted  in  1888  by  New  Jersey.  Now  in  force  in  majority 
of  states. 

METHODS  OF  CONSOLIDATING— 

1.  MERGER.  One  of  the  original  companies  acquires  the  net  assets  of 

the  other  companies,  vendors  dissolving.  Acquired  properties 
operated  as  branch  works  or  dismantled. 

2.  AMALGAMATION,  A  new  company  is  formed  to  acquire  the  net  assets  of 

the  consolidating  companies •  vendors  dissolving.  Acquired  prop- 
erties operated  as  branch  works  or  dismantled, 

3.  HOLDING  COMPANY.   One  of  the  old  companies  or  a  new  company  acquires 

a  controlling  interest  in  the  capital  stock  of  the  consolidating 
companies.   Original  companies  retain  their  corporate  existence 
and  operate  separately, 

BALANCE  SHEET — Balance  sheet  of  merged  or  amajLgamated  company  and  holding 
company  contrasted  as  to  information  conveyed  with  regard  to: 

1.  Relation  of  quick  assets  to  fixed  assets, 

2.  Relation  of  capital  investment  to  fixed  assets. 

3.  Working  capital  as  represented  by  the  excess  of  current  assets  over 

current  liabilities, 

4.  Surplus  available  for  dividends. 

Copyright,  1919,  The  Ronald  Press  Company 


11-27-17 

CONSOLIDATED  BALANCE  SHEET — A  consolidated  balance  sheet  does  not,  nor  does 
it  pretend  to,  represent  the  financial  condition  of  any  particular  corporation, 
or,  in  fact,  any  legal  entity  whatsoever.   It  is  a  statement  set  up  in  balance 
sheet  form  which  represents  the  true  financial  condition  of  a  group  of  com- 
panies which  from  a  practical  point  of  view  are  in  reality  one  organization. 
In  the  preparation  of  such  a  statement  all  items  affecting  the  companies  inter 
se  are  eliminated  so  as  to  present  their  financial  position  so  far  as  the 
public  is  concerned. 

■MODUS  OPERANDI"  — 

1.  On  the  consolidating  working  sheet  the  accounts  are  15sted  vertically 
and  the  companies  horizontally,  with  additional  horizontal  columns  for  "Inter- 
company Adjustments"  and  "Consolidated  Balance  Sheet."  Reverse  method  may 
also  be  used.   The  intercompany  transactions  to  be  eliminated  are  listed  in 
the  "Intercompany  Adjustments"  column.   Similar  assets  and  similar  liabilities 
are  aggregated  and  the  totals  listed  in  the  "Consolidated  Balance  Sheet" 
column. 

2.  Heading  of  consolidated  balance  sheet  should  indicate  clearly  that 
that  statement  shows  the  condition  of  all  the  affiliated  companies  and  not 
merely  the  holding  company  alone. 

ADVANCES  TO  AKTO  FROM  AFFILIATED  COMPANIES  may  consist  of : 

1.  Loans  by  holding  company  to  subsidiary,  evidenced  by  open  account 

or  note. 

2.  Loans  by  subsidiary  to  holding  company,  evidenced  by  open  account 

or  note. 

3.  Loans  by  one  subsidiary  to  another  subsidiary,  evidenced  by  open 

account  or  note. 

The  loans  receivable  and  loans  payable,  being  exactly  equal,  offset  each 
other  and  neither  is  shown  in  the  consolidated  balance  sheet, 

DIVIDENDS — Dividends  payable  by  an  affiliated  company  which  will  be  re- 
ceived in  toto  by  another  affiliated  company  are  eliminated.   If  the  entire 
dividend  does  not  pass  to  the  holding  company,  that  proportion  pertaining  to 
parties  outside  the  organization  is  shown  as  a  current  liability.   That  pro- 
portion of  the  dividends  receivable  not  derived  from  an  affiliated  company  is 
shown  as  a  current  asset. 

INTERCOMPANY  SALES  AND  PURCHASES — The  amount  due  from  affiliated  companies 
for  goods  sold  should  equal  the  amount  due  to  affiliated  compeinies  for  goods 
purchased,  and  both  are  eliminated, 

INTERCOMPANY  NOTES  RECEIVABLE  DISCOUNTED— Where  a  not©  iS  Signed  by  one 
affiliated  company  and  discounted  by  another,  the  liability  of  the  several 
companies  considered  as  one  organization  is  direct,  not  contingent,  and  would 
be  shown  as  "Notes  Payable." 

Copyright,  1919,  The  Ronald  Press  Company 


11-27-18 

INTERCOMPANY  BOND  OWNERSHIP — Holding  company  may  own  part  or  all  of  the 
subsidiaries'  outstanding  bonds,  and  the  subsidiaries  may  own  part  or  all  of 
the  holding  company's  bonds,  or  the  bonds  of  other  subsidiaries.   In  any 
event,  the  par  value  of  the  intercompany  bonds  owned  by  affiliated  companies 
would  offset  the  corresponding  liability  of  the  issuing  affiliated  companies, 
and  on  the  consolidated  balance  sheet  there  would  appear  only  those  bonds  of 
affiliated  companies  which  were  held  by  the  public, 

INTERCOMPANY  STOCK  OWNERSHIP  AND  GOOD-WILL— 

1.  Where  a  holding  company  acquires  the  shares  of  a  subsidiary  at  book 
value ,  the  investment  account  on  the  books  of  the  holding  company  is  exactly 
offset  by  the  par  value  of  the  capital  stock  appearing  on  the  books-  of  the 
subsidiaries  and  the  proportion  of  the  surplus  pertaining  to  those  shares, 
and  both  are  eliminated. 

2.  Where  a  holding  company  acquires  the  shares  of  a  subsidiary  at  a  price 
in  excess  of  the  book  value,  such  excess  represent  intangible  value  in  the 
nature  of  good-will.   If  possible,  it  should  not  be  merged  with  tangible 
values.   It  cannot  be  considered  as  a  charge  to  surplus  as  that  procedure 
would  treat  the  excess  paid  as  a  loss. 

3.  Where  a  holding  company  acquires  the  shares  of  a  subsidiary  at  a  price 
less  than  the  book  value  the  difference  should  be: 

(a)  Applied  in  reduction  of  any  existing  good-will,  or 

(b)  In  reduction  of  the  valuation  placed  on  "Cost  of  Properties." 

(c)  If  there  are  no  intangible  values  to  be  extinguished,  may  be 

shown  as  a  capital  surplus,  but  not  as  "Surplus"  available  for 
dividends. 

4.  Good-will  in  the  consolidated  balance  sheet  is  used  in  its  broadest 
sense,  i.e.,  to  represent  any  intangible  value. 

MINORITY  STOCKHOLDERS — If  the  holding  company  does  riot  own  all  the  shares 
of  its  subsidiaries,  the  equity  of  the  minority  stockholders  would  consist  of: 

1.  The  par  value  of  the  capital  stock  held  by  the  minority  stockholders, 

2.  That  proportion  of  the  undistributed  surplus  to  which  they  are  en- 
titled by  virtue  of  their  ownership  of  the  aforementioned  stock.   This  equity 
would  be  shown  on  the  consolidated  balance  sheet  thus: 

MINORITY  STOCKHOLDERS'  INTEREST  IN  AFFILIATED  COMPANIES: 

Capital  Stock  (par  value)  $ 

Surplus  $ 


It  is  customary  to  aggregate  the  entire  minority  stockholders'  interest  in 
the  various  subsidiaries  in  the  manner  just  indicated,  and  no  effort  is  made 
to  show  the  amount  of  such  interest  in  any  particular  subsidiary. 

SURPLUS  (Undistributed  Profits  Available  for  Dividends) — 

1.  SURPLUS  OF  SUBSIDIARY  AT  DATE  OF  PURCHASE  by  holding  company  is  part 
of  the  assets  acquired,  and  should  be  applied  in  reduction  of  the  holding  com- 
pany's investment  account  for  the  purpose  of  preparing  a  consolidated  balance 

Copyright,  1919,  The  Ronald  Press  Company 


11-27-19 

sheet.   Only  the  holding  company's  proportion  of  the  profits  earned  after  the 
date  the  controlling  interest  was  acquired  can  be  considered  as  Surplus  avail- 
able for  dividends. 

2.  DATE  OF  PURCHASE  is  date  contract  was  entered  into  and  not  the  date 
the  transfer  was  actually  consummated,  provided  the  purchaser  had  a  legal 
existence  at  that  date. 

3.  INTERCOMPANY  PROFITS  IN  INVENTORIES  consist  of  the  profits  made  by  an 
affiliated  company  on  goods  sold  to  another  affiliated  company,  and  on  hand  in 
the  latter 's  inventory.   Such  profit  is  not  earned  (from  the  viewpoint  of  the 
organization)  until  a  sale  is  made  to  a  solvent  debtor  outside  the  organiza- 
tion.  The  intercompany  profit  should  be  deducted  in  toto  from  the  surplus 
pertaining  to  the  holding  company.  No  portion  can  be  deducted  from  the 
minority  stockholders'  interest  in  the  surplus,  since  these  profits  are  earned 
so  far  as  the  individual  companies  are  concerned, 

4.  INTERCOMPANY  PROFITS  IN  CONSTRUCTION  consist  of  the  profits  made  by 
an  affiliated  company  on  construction  work  performed  for  another  affiliated 
company.   Following  the  generally  accepted  practice  that  construction  work 
performed  by  a  company  for  itself  should  be  valued  at  cost,  it  would  seem  that 
construction  work  performed  by  one  unit  for  another  should  also  be  valued  at 
cost  within  the  organization.   Intercompany  profit  should  be  excluded  and,  as 
aforementioned,  should  be  deducted  in  toto  from  the  surplus  pertaining  to  the 
holding  company  because  so  far  as  the  performing  company  is  concerned,  the 
profit  is  realized, 

OTHER  METHODS  OF  STATING  THE  FINANCIAL  POSITION  OF  HOLDING  COMPANIES— 

1.  Summarize  the  financial  condition  of  the  subsidiary  under  the  heading 
of  "Investment  in  Subsidiary." 

2.  Attach  a  balance  sheet  of  the  subsidiary  as  an  exhibit  supporting  the 
asset  of  "Investment  in  Subsidiary." 

3.  Attach  a  columnar  statement  containing  the  balance  sheets  of  the  indi- 
vidual companies  and  a  combined  balEince  sheet  (after  eliminating  all  inter- 
company items)  as  an  exhibit  supporting  the  asset  of  "Investments  in 
Subsidiary  Companies  Controlled." 

4.  Using  the  consolidated  balance  sheet  form  as  first  outlined,  take  up 
only  the  holding  company's  proportion  of  the  assets  and  liabilities  of  the 
subsidiaries  so  as  to  avoid  showing  "Minority  Stockholders  Interest  in  Sub- 
sidiary Companies." 

WHEN  IS  A  COMPANY  A  SUBSIDIARY?— 

1.  An  investment  in  shares  of  another  compeuiy  is  a  marketable  investment 
in  case  of : 

(a)  Temporary  investment  of  surplus  funds  in  shares  of  another 

company. 

(b)  Company  purchasing  such  shares  as  stock-in-trade. 

Copyright,  1919,  The  Ronald  Press  Company 


11-27-20 

2.  An  investment  in  shares  of  another  company  is  a  permanent  investment 
In  case  of: 

(a)  Purchase  of  shares  as  investment  of  reserve  funds, 

(b)  Purchase  of  shares  for  purpose  of  controlling  facilities  as  in 

the  case  of  a  union  depot  company. 

3.  Relation  of  holding  company  and  subsidiary  arises  where  one  company: 

(a)  Owns  a  majority  of  the  voting  stock  of  another;  and 

(b)  Exercises  the  control  obtained  by  virtue  of  such  majority 

ownership. 

NOP  COMPANY  &  SUBSIDIARIES 
CONSOLIDATING  WORKING  SHEET 

DEBITS 

INTERCOMPANY   CONSOLIDATED 


ACCOUNT 

A  B  CO. 

C  D  CO. 

N  0  P  CO. 

ADJUSTMENTS 

BALANCE  SHE] 

Investment  in  Capital 

' 

Stock  of  A  B  Co. 

500  shares  at  $100 

$  50,000 

(A)$50,000 

Investment  in  Capital 

Stock  of  CD  Co. 

250  shares  at  $100 

25,000 

(B)  25,000 

Cash 

(   500 

$  1,300 

25,000 

$  26,800.00 

Receivables 

10,000 

18,000 

28,000.00 

Inventories 

14,500 

21,200 

35,700.00 

Land 

10,000 

10,000.00 

Buildings 

25,000 

25,000.00 

Furniture  &  Fixtures 

7,500 

2,500 

10,000.00 

$67,500 

$43,000 

$100,000 

$75,000 

$135,500.00 

CREDITS 

Accounts  Payable 

$16,000 

$18,000 

$  34,000.00 

Accrued  Wages 

1,500 
(  50,000 

(A)$50,000 

1,500.00 

Capital  Stock 

( 

25,0  00 

(B)  25,000 

( 

$100,000 

100,000.00 

, 

$67,500 

$43,000 

$100,000 

$75,000 

$135,500.00 

REFERENCES : 

Dickinson,  pages  176-186 
Kester,  Vol.  2,  pages  600-619 


Copyright,  1919,  The  Ronald  Press  Company 


11-27-21 


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^      Copyright,  1919,  The  Ronald  Press  Compasy 


II-28-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 

Lecture  28 

CLOSING  THE  AUDIT;  REPORTS 


Problem  62 

The  Montauk  Manufacturing  Co.  becomes  insolvent  and  the  receiver  appointed 
to  wind  up  its  affairs  has  a  balance  sheet  prepared  from  the  books  which  shows 
the  following  values: 

MONTAUK  MANUFACTURING  COMPANY 
BALANCE  SHEET,  JULY  2,  1919 


ASSETS 


LIABILITIES 


Cash 

Bills  Receivable 
Accounts  Receivable 


(  1,402  Bills  Payable 

Accounts  Payable 


Raw  Material 

$16,200 

Partly  Manufactured 

Goods 

5,400 

Finished  Wares 

13,900 

Consumable  Supplies 

300 

Factory  Site  and  Buildings 

Machinery 

$50,000 

Tools  and  Appliances 

7.000 

Boats 

8,000 

Horses  and  Trucks 

4,000 

Office  Fixtures 

600 

$  2,108 

19,740   21,848   Interest  on  Bonds  due  July 

2,  1919 
Bonds  (Issued  for  factory 

site  and  building) 
Taxes,  Wages,  etc..  Due 


35,800 


90,000 


Deficiency  (Losses) 


69,600 

$218,650 

72,010  Capital  Stock 


$290,660 


$  30,000 
65,460 

2,700 

90,000 
2,500 


$190,660 
100,000 

$290,660 


The  machinery,  boats,  and  horses  and  trucks  are  pledged  on  chattel  mort- 
gage to  secure  creditors  to  the  amount  of  $45,000,  $6,000,  and  $3,000,  re- 
spectively. 

The  mortgagees  of  the  machinery  agree  to  purchase  it  for  $30,000,  and  the 
other  mortgagees  agree  to  take  over  the  chattels  in  full  satisfaction,  which 
offers  are  believed  to  exceed  what  the  securities  would  realize  on  forced  sale. 

It  is  estimated  that  raw  materials  and  partly  made  and  finished  wares  can 
be  sold  for  $29,000,  while  the  consumable  supplies  are  not  in  marketable  quan- 


Copyright,  1919,  The  Ronald  Press  Company 


11-28-2 

titles;  that  the  tools  and  appliances  will  bring  $4,000,  and  the  office  furni- 
ture $500.   The  bills  receivable  are  all  good,  but  $1,640  of  book  debts  are 
uncollectible.   Customers*  notes  to  the  amount  of  $7,000  have  been  discounted 
and  the  maker  of  one  of  said  notes  for  $340  has  failed. 

Prepare  a  statement  of  affairs  and  a  deficiency  accountt 

Problem  63  • 

The  Hampton  Circle  Swing  Cot  was  organized  in  New  York  on  April  1,  1912, 
with  an  authorized  capital  stock  of  $500,000,  divided  into  5,000  shares  of  the 
par  value  of  $100  each.   The  certificate  of  incorporation  was  filed  April  5, 

At  a  meeting  of  the  directors  held  on  April  6,  there  was  acquired  from 
W.  J.  Hampton  at  a  valuation  of  $500,000  all  his  right,  title,  and  interest  in 
various  patents  held  by  him  on  the  Hampton  Circle  Swings. 

In  order  to  raise  funds  with  which  to  exploit  the  invention,  Mr.  Hampton 
donated  to  the  company  2,499  shares  of  stock.  Of  this,  2,250  shares  were  sold 
from  time  to  time  at  an  average  price  of  90,  and  225  shares  were  used  in  giving 
a  bonus  of  10%  in  stock. 

The  parts  necessary  to  erect  and  equip  three  swings  were  purchased  from 
the  Danielson  Iron  Co.   The  cost  was  $73,247.92,  of  which  $50,000  was  paid  in 
cash.   The  labor  incident  to  erection  was  paid  for  in  cash  and  amounted  to 
$45,386.58.   One  swing  was  installed  at  Coney  Island  at  a  cost  of  $39,544.83; 
one  at  Atlantic  City  at  a  cost  of  $41,275.17;  and  one  at  Fort  George  at  a  cost 
o'  $37,814.50.   The  privileges  cost  collectively  $12,000.   The  net  income  from 
the  operation  of  the  swings  for  the  season  was:  Coney  Island  $12,273.85  (sold 
before  Labor  Day  for  $50,000)  ;  Atlantic  City  $2,863.15  (installation  not  com- 
pleted until  after  July  4)  ;  Fort  George  $6,743.35.   The  salaries  and  expenses 
of  the  company  from  April  1  to  September  30,  1919,  were  $18,787.59.   The  bal- 
ance on  account  was  paid  to  the  Danielson  Iron  Co.  and  $2,000  was  paid  for  a 
privilege  at  Ocean  City  for  the  season  1913. 

Prepare : 

(a)  Journal  entries  opening  the  books  of  the  Hampton  Circle  Swing  Co. 

and  covering  subsequent  transactions. 

(b)  Balance  sheet,  September  30,  1912, 


QUESTIONS  ON  AUDITING 

Question  151— The  profits  of  a  corporation  with  a  paid-up  capital  of 
$5,000,000  amount  to  $337,193.08  for  a  given  year,  without  allowing  for  its 
mortgage  interest.  At  the  end  of  the  previous  financial  year  there  was  left 
a  balance  of  undivided  profits  of  $27,806.92. 

Its  4%  mortgages  are  $500,000  and  its  6%  mortgages  are  $750,000.  How  much 
must  be  taken  from  the  previous  year's  surplus  balance  to  pay  the  stockholders 
a  dividend  of  6%? 

Question  152 — Is  it  necessary  for  depreciation  to  be  written  off  the  ac- 
counts of  a  company,  whose  property  is  of  a  wasting  nature,  such  as  a  cemetery, 
before  declaring  a  dividend?  State  your  reasons  for  your  answer. 

Copyright,  1919,  The  Ronald  Press  Company 


I 1-28-3 

Question  153— Specify  some  of  the  closing  entries  to  be  made,  after  the 
agreement  of  the  trial  balance  in  the  books  of  an  architect's  business  in  which 
two  partners  are  interested. 

Question  154 — The  secretary  of  a  company,  who  has  complete  control  over  the 
books  and  cash,  has  absconded,  and  the  directors  instruct  you  to  examine  the 
accounts  with  a  view  to  ascertaining  whether  there  are  any  irregularities. 
What  steps  would  you  take  to  satisfy  yourself  on  this  point? 

Question  155 — What  authority  would  you  require  as  auditor  for  passing  the 
remuneration  of  the  directors  of  a  company,  and  to  what  book  would  you  refer  to 
ascertain  the  names  of  the  persons  entitled  thereto? 


Solution  to  Problem  57 

The  following  errors  in  principle  and  misstatement  of  facts  appear  in  the 
balance  sheet  and  statement  of  profits  and  income  of  the  American  Optimist  Co. 

PROPERTY  ACCOUNT 

1.  If  the  necessary  data  are  available.  Patents  and  Good-Will  should  be 
separated  from  the  tangible  assets. 

2.  The  Discounts  and  Commission  on  Bonds  should  be  shown  as  a  deferred 
charge  except  as  to  that  portion  of  the  total  discount  and  commission  which 
relates  to  the  period  of  construction.   Bond  discount  and  commission  is  an 
addition  to  the  nominal  rate  of  interest  paid  and  should  be  amortized  over  the 
term  of  the  bonds. 

3.  The  Expenditures  in  Dismantling  the  plant  at  Hoboken  are  not  proper 
charges  to  Property  account.   The  conservative  treatment  would  be  to  write  off 
these  charges  against'  the  operating  expenses  of  the  current  period,  but  where 
the  depreciation  reserve  is  adequate  the  cost  of  dismantling  should  be 
charged  thereagainst. 

4.  The  charges  in  respect  of  Remodeling  and  Reconstructing  Department  C 
apparently  take  the  form  of  improvement  expenditures  which,  strictly  speaking, 
should  be  apportioned  between  (a)  Property  and  (b)  Deferred  Charges  to 
Operating, 

CURRENT  ASSETS 

5.  Stocks  and  Bonds  in  Treasury  at  par  ($2,000,000)  apparently  refers  to 
the  company's  own  securities  which  have  been  reacquired.   These  treasury 
securities  should  be  deducted  from  the  authorized  issue  of  stock  and  bonds  re- 
spectively in  order  to  set  out  the  amount  issued  and  outstanding. 

6.  Investments  in  other  Companies  held  as  Permanent  Investments  ($375,000) 
are  not  current  assets  and  should  be  set  out  separately  between  capital  and 
current  assets  under  the  caption  of  Permanent  Investments. 

7.  Inventories  of  Raw  Materials  and  Supplies  ($2,600,000)  and  Finished 
Goods  and  Work  in  Progress  ($500,000)  are  properly  set  out  if  the  cost  is  less 
than  the  market. 

Copyright,  1919,  The  Ronald  Press  Company 


II-28-4 

8.  Consigned  Merchandise  ($150,000).   To  value  such  stocks  at  the  selling 
value  (presumably  estimated)  is  to  take  credit  for  the  profit  before  it  was 
earned,  which  is  contrail  to  the  accounting  principle  of  "anticipate  no 
profits  and  provide  for  all  possible  losses."  Should  be  valued  at  cost  or 
market,  whichever  is  the  lower. 

9.  Contracts  under  Way  ($1,500,000).   These  should  be  valued  on  the  same 
basis  as  the  other  inventories.  The  method  adopted  by  the  company  results  in 
the  anticipation  in  the  current  period  of  all  the  profit  which  may  be  earned  up 
to  the  date  of  completion.  And  if  the  estimated  cost  to  complete  should  prove 
to  be  an  underestimate,  a  profit  has  been  anticipated  which  will  never  be 
earned.  If  the  contracts  can  be  split  into  independent  sections  it  would  be 
permissible  to  take  up  the  profit  on  each  section  as  completed. 

10.  Accounts  and  Bills  Receivable — Gross  ($1,400,000).   The  use  of  the  word 
"gross"  would  indicate  that  no  provision  has  been  made  for  bad  and  doubtful 
accounts,  discounts,  allowances,  etc.  Failure  to  do  so  has  the  effect  of  over- 
stating both  the  Accounts  and  Bills  Receivable  and  Surplus  accounts  on  the  bal- 
ance sheet  and  the  net  profits  for  the  current  year. 

11.  Cash  and  other  Cash  Assets,  including  Deposits  with  the  Trustee  under 
Mortgage  ($650,000).   The  point  here  seems  to  be  that  the  deposits  with  the 
trustee  have  been  included  among  the  free  cash  assets.  The  amount  of  the  de- 
posits should  be  set  out  separately  as  such  between  Permanent  Investments  and 
the  Current  Assets.  Any  part  of  the  deposits  so  called  representing  bonds 
redeemed,  should  be  deducted  from  the  liability  of  Bonded  Indebtedness  Out- 
standing. 

DEFERRED  CHARGES 

12.  Whether  the  advertising  expenses  can  be  properly  carried  forward  de- 
pends on  the  character  of  the  business  and  of  the  advertising.  If  it  be  a 
seasonal  business,  or  if  the  advertising  represents  an  extraordinary  campaign 
the  benefits  from  which  will  accrue  in  the  following  period,  it  may  be  permissi- 
ble to  carry  forward  the  expenditure.  As  a  general  rule,  where  advertising 
expenditures  are  deferred,  it  is  advisable  to  provide  a  reserve  for  the  expenses 
to  be  incurred  in  collecting  the  outstanding  receivables. 

The  items  referred  to  in  (3)  and  (4)  should  be  included  under  this  caption, 

CAPITAL  STOCK  AND  BONDED  INDEBTEDNESS 

13.  The  amount  of  the  treasury  or  unissued  stock  should  be  deducted  from  the 
amount  of  $5,000,000,  assuming  that  the  latter  amount  represents  the  authorized 
issue. 

14.  The  amount  of  the  bonds  taken  up  or  redeemed  to  December  31,  1918,  should 
be  deducted  from  the  original  issue  in  order  to  set  out  the  liability  at  the 
latter  date. 

RESERVE  FUNDS 

15.  The  caption  Reserve  Funds  is  a  misnomer  inasmuch  as  Reserve  Funds  refer 
to  the  assets  comprising  the  reserves  if  such  assets  are  ear-marked.  The  proper 
caption  is  Reserves. 

Copyright,  1919,  The  Ronald  Press  Company 


II-28-5 

16.  If  the  temglble  property  assets  (other  than  land)  could  be  set  out 
separately,  it  would  be  better  treatment  to  deduct  the  Depreciation  and  Accru- 
ing Renewal  Reserve  therefrom  instead  of  showing  the  same  on  the  liability 
side  of  the  balance  sheet.   Should  it  be  inadvisable  to  so  separate  the  Prop- 
erty account  the  treatment  already  adopted  appears  to  be  the  better  one. 

17.  Reserve  for  Unaudited  Bills  ($50,000).  Should  have  been  included  as 
part  of  the  current  liabilities  inasmuch  as  it  represents  what  are  ordinarily 
termed  outstanding  liabilities* 

SURPLUS 

18.  Adjustments  ($250,000).   The  item  being  deducted  from  the  Surplus  ac- 
count indicates  that  the  amount  represents  adjustments  in  respect  of  the  opera- 
tions prior  to  January  1,  1918.  Assuming  this  to  be  the  case,  it  still  appears 
to  be  desirable  to  describe  the  item  more  fully. 

19.  The  Net  Earnings  of  $1,500,000  are  correctly  stated  subject  to  the 
remarks  under  the  heading  of  Statement  of  Profits  and  Income. 

20.  Appropriation  of  $100,000  for  Bond  Sinking  Fund  should  have  been  shown 
as  a  deduction  in  the  statement  of  profits  and  income  for  the  year  ending 
December  31,  1918,  as  the  appropriation  is  usually  made  out  of  the  current 
profits  rather  than  the  Surplus  account.  If  the  resolution  stated  that  an  ap- 
propriation of  surplus  should  be  made  for  Bond  Sinking  Fund  the  method  given 
would  be  correct. 

21.  Depreciation  ($150,000).  Where  the  appropriation  represents  approxi- 
mately the  current  accruing  depreciation  it  should  be  considered  as  a  manufac- 
turing expense  and  thus  enters  into  the  Cost  of  Sales  as  shown  by  the  statement 
of  profits  and  income  except  for  that  portion  chargeable  to  Finished  Product 
and  Work  in  Progress  Inventories  at  December  31.  However,  judging  from  the 
amount  involved  the  appropriation  appears  to  be  an  arbitrary  amount  which  is 
materially  less  than  the  approximate  depreciation  accruing  during  the  period. 
In  such  cases  it  may  be  advisable  to  show  the  provision  as  an  appropriation  of 
surplus  rather  than  as  an  operating  expense. 

STATEMENT  OF  PROFITS  AND  INCOME 

22.  Gross  Sales  and  Consignments  ($8,575,000).   This  item  is  overstated  to 
the  extent  of  the  selling  price  of  the  unsold  consignments  included  therein. 
The  latter  should  be  eliminated. 

23.  Cost  of  Sales  ($6,825,000).  This  item  is  overstated  to  the  extent  of 
the  cost  value  of  the  unsold  consignments  referred  to  in  (22). 

24.  Profits  on  Contracts  in  Progress  ($275,000)  apparently  represents  an 
estimated  anticipated  profit  which  should  be  excluded  from  the  statement  of 
profits  and  income  as  mentioned  in  (9). 

25.  Profits  on  Bonds  Purchased  ($15,000).  If  this  represents  a  profit  on 
the  purchase  and  sale  of  bonds,  the  item  is  correctly  stated.  If  it  represents 
the  difference  between  the  par  value  of  bonds  purchased  for  sinking  fund  or  for 
redemption,  the  proper  treatment  depends  on  the  circumstances.  The  trust  in- 
denture may  provide  that  such  profits  be  credited  to  the  Sinking  Fund  Reserve, 

Copyright,  1919,  The  Ronald  Press  Company 


II-28-6 

If  not  it  should  be  shown  as  extraordinary  income  after  interest  charges  have 
been  deducted. 

26.  Taxes  ($25,000).  If  this  item  represents  taxes  assessed  on  property 
used  in  manufacturing  operations  it  should  be  treated  as  a  manufacturing  expense 
and  hence  included  as  part  of  Cost  of  Sales  except  as  to  that  part  chargeable  to 
Finished  Product  and  Work  in  Progress  inventory. 

27.  Interest  Charges  ($250,000).   The  net  profits  for  the  year  should  be 
arrived  at  before  deducting  interest  charges. 


Solution  to  Problem  58 
Balance 


WILLIAM  JONES— CAPITAL  ACCOUNT 
$39,023*96    Cash 


• 

$39,023.96 

Purchased  from  Hewson  & 
Fellows 

OFFICE  FURNITURE 
$1,093.75 

$  6,250.00 
8,042.68 
8,143.23 
8,243.77 
8,344.28 

$39,023.96 


Purchased  from  Hewson  & 
Fellows         , 


INVENTORY  OF  MERCHANDISE 
$16,892.00 


Purchased  from  Hewson  & 
Fellows 


ACCOUNTS  RECEIVABLE 
$18,200.00 


RESERVE  FOR  BAD  DEBTS 


Investment 


Provision  for  Bad  Debts 

$1,365.00 

CASH 

%   6,250.00 

Creditors  Paid 

$  6,250.00 

8,042.68 

Hewson  &  Fellows,  Vendor 

8,042.68 

8,143.23 

Notes  Payable  retired: 

8,243.77 

DATE    PRIN.      INT. 

8,344.28 

4/1  $8,042.69  $100.54 

8,143.33 

7/1   8,042.69   201.08 

8,243.77 

10/1   8.042.69   301.59 

8,344.28 

$39,023.96 

$39,023.96 

Copyright,  1919,  The  Ronald  Press  Company 


II-28-7 


Liabilities  Paid 


CREDITORS 
$6,250.00    Assumed  from  Hewson  &  Fellows  $6,250.00 


Cash  Paid 


NOTES  PAYABLE 


%  8,042.69 
8,042.69 
8,042.69 


$24,128.07 


Notes  issued  to  Hewson  k  Fellows: 
4/1  $8,042.69 

7/1  8,042.69 

10/1  8,042.69  $24,128.07 


$24,128.07 


Cash  Paid 


INTEREST  ON  NOTES  PAYABLE 
$100.54 


201.08 
301.59 

$703.21 


Balance 


$703.21 


$703.21 


Cash 

Notes  Payable  Issued 


HEWSON  *  FELLOWS — VENDOR  ACCOUNT 

$  8,042.68    Net  Assets  Purchased 
24,128.07 


$32,170.75 


$32,170.75 


$32,170.75 


ANSWERS  TO  QUESTIONS 

Answer  to  Question  141 — The  claim  referred  to  is  apparently  in  the  nature  of 
a  contingent  liability.   As  a  general  rule,  all  such  liabilities  should  be 
stated  in  a  footnote  on  the  face  of  the  balance  sheet.   Under  the  circumstances 
given  it  will  be  necessary  for  the  auditor  to  qualify  his  certificate,  and  to 
avoid  this  the  directors  may  accede  to  his  request. 

Answer  to  Question  142 — 

(a)  Directors  are  elected  by  the  stockholders  to  act  as  the  managers  of  the 
company.   The  board  of  directors  determines  the  policies  to  be  followed  and 
carries  out  these  policies  through  the  officers  appointed  by  them. 

(b)  The  auditor  should  pay  special  attention  to  all  transactions  arising 
between  the  company  and  the  directors  as  individuals. 

(1)  A  director  may  sell  goods  on  behalf  of  the  company,  but  the  sale  must 
be  made  in  the  usual  manner  and-  should  not  be  detrimental  to  the  company's  in- 
terests.  The  auditor  must  guard  against  the  milking  of  a  company  by  a  director 
for  his  personal  aggremdizement. 


Copyright,  1919,  The  Ronald  Press  Company 


II-28-8 

(2)  It  appears  that  unless  their  powers  are  specifically  limited  by  statute, 
by-laws,  or  a  resolution  adopted  at  a  stockholders'  meeting,  the  directors  can 
in  their  discretion  vote  to  pay  themselves  the  traveling  expenses  incurred  in 
attending  directors'  meetings.   If  this  be  done,  the  auditor  should  ascertain 
the  names  of  the  directors  present  at  each  meeting  so  as  to  satisfy  himself  that 
traveling  expenses  are  not  being  paid  to  absent  directors.  It  would  be  diffi- 
cult for  the  auditor  to  pass  upon  the  reasonableness  of  these  expenses  where 
the  bills  are  approved  by  the  board. 

(3)  The  directors  may  in  their  discretion  vote  to  waive  half  or  all  of  their 
fees.   Inasmuch  as  a  resolution  has  been  passed  waiving  half  of  the  directors* 
fees,  the  auditor  should  be  careful  to  note  that  only  half  of  the  usual  fees 
are  paid  during  the  current  year. 

Answer  to  Question  145 — The  directors'  remuneration  is  commonly  fixed  by  the 
by-laws,  and  in  such  cases  the  by-laws  should  be  perused  to  determine  the  amount 
to  be  paid  and  whether  it  is  payable  to  all  directors  or  only  to  those  present. 
If  the  point  is  not  covered  in  the  by-laws,  the  amount  to  be  paid  and  to  whom  it 
should  be  paid  would  be  stipulated  by  a  resolution  adopted  by  the  board  of  di- 
rectors. The  minute  book  would  give  the  names  of  the  directors  present  at  each 
meeting. 

Answer  to  Question  144 — Ascertain  how  each  note  receivable  has  been  dis- 
posed of:  (1)  by  receipt  of  cash  from  maker;  (2)  by  receipt  of  cash  when  dis- 
counted; (3)  by  transfer  to  a  creditor  or  other  party  to  apply  on  account;  (4) 
by  renewal. 

At  the  date  of  the  audit  it  may  be  usually  assumed  that  all  notes  maturing 
prior  to  that  date  have  been  paid  by  their  makers  unless  notice  of  default  has 
been  received.   The  unmatured  notes  represent  a  contingent  liability  which 
should  be  expressed  on  the  balance  sheet. 

All  notes  not  discounted  should  be  on  hand  and  produced  for  inspection. 
If  out  for  collection  verification  may  be  made  through  correspondence  with  th© 
attorneys. 

Answer  to  Question  145 — 

(a)  Shop  wages  paid.   The  first  step  in  verification  of  this  class  of  ex- 
penditure is  to  make  an  inquiry  into  the  system  of  internal  check  surrounding 
the  pay-roll  disbursements.   Much  depends  upon  the  adequacy  of  the  system  of 
internal  check.   Pay  special  attention  to  the  system  of  paying  off.  Ascertain 
how  envelopes  not  called  for  on  pay-day  are  handled.   Comparison  of  the  time 
tickets  or  other  record  of  workmen's  time  should  be  made  with  the  pay-roll 
book,  extensions  and  footings  verified,  and  the  totals  of  each  sheet  traced  to 
the  recapitulation  or  summary  and,  finally,  the  grand  total  traced  to  the  gen- 
eral ledger  accounts.   Properly  authorized  and  approved  memoranda  in  respect  of 
new  employees  engaged,  changes  in  rates,  and  transfer  from  one  department  to 
another  should  be  examined. 

The  pay-rolls  should  bear  the  certification  of  responsible  employees  as  to 
the  correctness  of  the  various  parts  of  the  work.  Finally  the  rolls  should  bear 
the  approval  of  a  responsible  official. 

Copyright,  1919,  The  Ronald  Press  Company 


II-28-9 

(b)  Dividends  paid.  Reference  should  be  made  to  the  minutes  of  the  meeting 
of  the  directors  at  which  the  dividend  was  declared.  Canceled  voucher  checks 
or  other  evidence  should  be  examined  in  respect  of  the  payment  of  the  dividends. 

(c)  Merchandise  purchases.   Examine  the  invoices  supporting  the  entries 
noting  evidence  as  to: 

1.  Receipt  of  goods  of  proper  quality 

2.  Correctness  of  prices  £ind  terms 

3.  Correctness  of  clerical  accuracy  of  invoice 

4.  Approval  for  payment 

5.  Correctness  of  accounts  charged 

6.  Whether  all  cash  discounts  are  taken 

Special  attention  should  be  given  to  the  manner  in  which  an  invoice  is  put 
through.  Approvals  are  apt  to  be  perfunctory,  especially  where  rubber  stamps 
are  used.  If  this  condition  is  found,  a  rather  thorough  check  of  the  details  is 
essential.   All  invoices  examined  should  be  canceled  at  the  time  by  the  use  of 
a  rubber  stamp  or  other  device  to  prevent  one  invoice  being  presented  in  sup- 
port of  two  entries. 

REFERENCES ; 

Montgomery,  pages  235-292 
Wildman,  pages  159-177 


Copyright,  1919,  The  Ronald  Press  Company 


11-28-11 


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Copyright,  1919,  The  Ronald  Press  Company 


II-29-1 


COMPLETE  ACCOUNTING  COURSE— PART  II 
Lecture  29 
OTHER  KINDS  OF  AUDITS 


Comments  on  Audit  Problem 

The  student  now  has  in  his  possession  a  file  of  working  papers  for  which 
he  should  prepare  an  index.  The  papers  may  be  arranged  alphabetically  (com- 
mencing with  accounts  payable)  or  in  the  same  order  as  the  items  appear  on  the 
trial  balance  or  balance  sheets,  etc. 

In  addition  to  the  working  papers  which  have  been  presented,  a  balance 
sheet  audit  would  ordinarily  require : 

1.  Abstract  of  the  minutes  of  the  board  of  directors  at  least  during  the  past 
year  and  up  to  the  date  of  the  audit.   It  may  be  desirable — as  in  this  case — 
to  go  back  to  the  inception  of  the  organization.   (See  Montgomery,  pages  179- 
181.) 

2.  Certificates  from  banks  showing,  (a)  amounts  on  deposit  at  close  of  year 
and  in  some  cases  at  the  date  of  the  examination  of  the  cash,  and  (b)  liabili- 
ties in  the  way  of  bank  loans,  discounted  paper,  etc.,  that  would  likely  affect 
the  financial  position  of  the  company. 

3.  Certificates  from  officers  in  charge  of  taking  inventory  and  pricing 
same  to  the  effect  that  amounts  are  correct  and  that  values  are  the  lower  of  cost 
or  market. 

4.  Certificates  from  officers  stating  that  all  known  liabilities  at  the 
close  of  the  year  had  been  put  on  the  books  as  of  that  date. 

5.  Analyses  of  some  of  the  leading  profit  and  loss  accounts,  such  as  Re- 
pairs, Officers'  and  Office  Salaries,  Interest  Paid  and  Received,  Heat,  Light, 
and  Power,  etc.   The  nature  of  the  analysis  would  depend  on  the  circumstances 
of  the  case,  i.e.,  the  care  with  which  distributions  had  been  made  and  the  cor- 
rectness of  the  theory  underlying  the  distributions.   Comparison  with  the  cor- 
responding account  of  the  previous  year  is  suggestive. 

6.  Comments  of  a  varied  nature  covering  any  point  arising  during  the  audit. 
These  will  include  criticisms  of  the  system  in  use,  whether  they  deserve  men- 
tion in  the  report  or  not  ;  data  on  the  nature  of  the  examination  of  the  cash 
book,  voucher  record,  ledgers,  etc.,  in  the  way  of  testing  the  accuracy  of  the 
records;  missing  vouchers,  canceled  checks,  or  other  records  that  were  missing 
or  in  which  discrepancies  existed,  etc.   These  comments  should  be  made  not  in 
phrases,  words,  or  abbreviations,  but  in  full  English  sentences  so  that  six 
months  hence  there  will  be  no  doubt  as  to  their  meaning.  Notes  of  this  kind 
made  during  an  audit  will  determine  whether  an  auditor  is  capable  of  discrimi- 
nating between  relevant  and  irrelevant  facts.  Mention  of  the  latter  should,  of 
course,  be  avoided  on  the  working  papers* 

Copyright,  1919,  The  Ronald  Press  Company 


II-29-2 

?•  At  the  close  of  an  audit  a  summary  may  be  made  foj?  the  auditor's  files 
which  may  be  used  in  connection  with  a  future  audit  of  the  same  concern.   Com- 
ments on  the  system,  names,  and  duties  of  the  officers  and  certain  employees, 
and  other  informational  points  may  be  followed  by  a  program  of  the  audit,  show- 
ing the  nature  of  the  work  done  and  the  approximate  time  of  each  operation  per- 
formed, together  with  recommendations  as  to  future  audits. 

8.  In  this  case  it  should  be  assumed  that  separate  examination  has  been 
made  of  the  subsidiary  company's  accounts,  with  the  results  as  summarized  in  the 
working  papers.   Because  of  the  similarity  of  working  papers  those  pertaining 
to  the  accounts  of  the  D,  B.  Story  Manufacturing  Co.  have  been  omitted. 

Assignment  in  Connection  with  F.  L.  Barnes  &  Co.  audit 

Exhibits  have  been  prepared  for  the  report  as  follows: 

Exhibit 

I  Consolidated  balance  sheet 
II  Consolidated  income  statement 
III  Comparative  balance  sheets  of  F.  L*  Barnes  &  Co.  December  31, 
1917,  and  December  31,  1918 
IV  Comparative  profit  and  loss  statements  of  F.  L.  Barnes  &  Co. 
for  the  years  ending  December  31,  1917,  and  December  31, 
1918 
IV-a  Comparative  statements  of  cost  of  sales  for  the  years  ending 
December  31,  1917,  and  December  31,  1918 

Write  a  brief  report  summarizing  the  findings  during  the  audit  and  includ- 
ing the  following  items: 

(a)  Analysis  showing  causes  of  changes  in  profits  during  the  last  year 

as  compared  with  the  previous  year. 

(b)  Any  comments  on  the  profit  and  loss  statement  which  you  think  im- 

portant to  call  to  the  attention  of  the  management.   It  should  be 
remembered  that  the  present  audit  is  a  regular  yearly  audit,  and 
your  remarks  should  be  governed  accordingly. 

(c)  Condensed  statement  of  condition  prepared  from  the  balance  sheet 

of  December  31,  1918,  bringing  out  the  ratio  between  current 
assets  and  liabilities. 

(d)  Comments  on  the  principal  balance  sheet  items. 

(e)  Statement  showing  causes  of  change  in  financial  condition  (appli- 

cation of  funds)  from  January  1,  1918,  to  December  31,  1918. 

(f )  Special  comments  which  you  think  desirable  in  connection  with  the 

conduct  of  the  audit,  including  the  nature  of  the  detailed  audit 
made. 


Copyright,  1919,  The  Ronald  Press  Company 


II-29-3 


Solution  to  Problem  59 


CENTRAL  MANUFACTURING  CO.  AND  SUBSIDIARIES 
CONSOLIDATING  WORKING  SHEET 


ACCOUNTS 
Plant  &  Equipment 
Inventories 

Advances  to  R.  Roe  &  Co. 
Advances  to  Cent,  Mfg.  Co. 
Customers 
Cash 

Notes  Rec.  of  J.  Doe  &  Co. 
Dividends  Receivable 
Investment  in  the  Capital 
Stock  of  John  Doe  &  Co. : 
750  shares  at  $100 s 
Par  Value 
Good-Will 
Investment  in  the  Capital 
Stock  of  Richard  Roe  &  Co. 
1000  shares  at  $100: 
Par  Value 
Good-Will 


J.  DOE 
&  CO. 
$  50,000 
30,000 
3,500 


25,000 
5,000 


ASSETS 

R.  ROE 
&  CO. 
$  97,500 
47 , 400 

7,500 

25,000 

3,850 


CENTRAL 
MFG.  CO. 


CONSOLIDATED 
INTERCOMPANY   BALANCE 


ADJUSTMENTS 


(A)$  3.500 

(B)  7,500 

$  59,000 

8,500  (C)  8,500 

3,000  (D)  3,000 


100,000 


(E)   75,000 


90,000 


(F)  100,000 


SHEET 
$147,500 
77.400 


50,000 
67,850 


25,000 


♦10,000 


$113,500  $181,250  $260,500    $197,500    $357,750 


*  Should  be  shown  in  red. 


LIABILITIES 


Capital  Stock: 

Doe 

Roe 

Central 
Accounts  Payable 
Notes  Payable — 

Central  Mfg.  Co. 
Dividends  Payable 
Adveuices  from  J.  Doe  k  Co. 
Advances  from  R.  Roe  k  Co. 
Surplus 


$  75,000 

(E)$ 

75,000 

$125,000 

$250,000 

(F) 

100,000 

(M)$  25,000 
250,000 

27,000 

46,500 

73,500 

8,500 

(C) 

8,500 

3,000 

(D) 

3,000 

3,500 

(A) 

3,500 

7,500 

(B) 

7,500 

6,250 

3.000 

$ 

(M)    1,250 

8,000 

$113,500 

$181,250 

$260,500 

197,500 

$357,750 

Copyright,  1919.  The  Ronald  Press  Company 


II-29-6 

Comments  on  Problem  60 

1.  On  account  of  the  large  amount  outstanding  at  December  31,  1918,  notes 
payable  have  not  been  considered  as  part  of  the  working  capital.   In  all  proba- 
bility the  funds  obtained  from  the  sale  of  bonds  were  used  to  retire  the  notes 
payable. 

2.  Note  the  manner  in  which  the  discount  on  bonds  sold  has  been  dealt  with. 


Solution  to  Problem  61 


X  Y  Z  AND  P  Q  COMPANIES 
CONSOLIDATING  WORKING  SHEET 


Real  Estate 
Buildings,  Plant,  and 

Equipment 
Good-Will 

Investment  in  P  Q  Co. : 
1,000  Shares,  Par 
Value  $100: 
Par  Value 
Surplus 
Good-Will 
Inventories 
Accounts  Receivable 
Cash 


DEBITS 

X  Y  Z  CO.      P  Q  CO. 
$  50,000.00  $»25,000.00 


INTERCOMPANY 
ADJUSTMENTS 


75,000.00 
25,000.00 


45,000.00 


CONSOLIDATED 
BALANCE 
SHEET 
$  75,000.00 

120,000.00 
(B)   25,000.00 


150,000.00  ♦ 

(A) $100,000. 00 
(A)   25,000.00 

(B)   25,000.00 
80,000.00    20,000.00  100,000.00 

60,000.00    70,000.00  (B)   15,000.00     115,000.00 
10,000.00    15,000.00  25,000.00 


$450,000.00  $175,000.00    $140,000.00    $485,000.00 


Accounts  Payable 

Lo£ins 

Capital  Stock: 
X  Y  Z  Company 
P  Q  Company 

Surplus : 

X  Y  Z  Company 
P  Q  Company 


CREDITS  CONSOLIDATED 
INTERCOMPANY    BALANCE 

X  Y  Z  CO.     P  Q  CO.  ADJUSTMENTS      SHEET 

$  50,000.00  $  50,000.00  (B)  $  15,000.00  $  85,000.00 

50,000.00   50,000.00 

250,000.00 250,000.00 

100,000.00  (A)   100,000.00 

100,000.00   100,000.00 

25,000.00  (A)    25,000.00 

$450,000.00  $175,000.00  $140,000.00   $485,000.00 


Copyright,  1919,  The  Ronald  Press  Company 


II-29-7 

(A)  Elimination  of  book  value  of  investment  in  P  Q  Company,  as  follows: 

Purchase  Price  $150,000.00 

DEDUCT — Par  Value  of  Shares  Acquired  $100,000.00 

Surplus  at  date  of  Purchase  25,000.00   125,000.00 


Excess  of  Purchase  Price  over  Book  Value  termed  Good-Will    $  25,000.00 


(B)  Elimination  of  intercompany  accounts  receivable  and  accounts  payable. 


X  Y  Z  AND  P  Q  COMPANIES 
CONSOLIDATED  BALANCE  SHEET.  JANUARY  1,  1919 

ASSETS 
CAPITAL  ASSETS: 

Real  Estate  120,000.00 

Buildings,  Plant,  and  Equipment  $  75,000.00 


$195,000.00 
Good-Will  50,000.00  $245,000.00 


CURRENT  ASSETS:  JIOO.OOO.OO 

Inventories  115,000.00 

Accounts  Receivable  25,000.00   240,000.00 

Cash  

$485,000.00 


LIABILITIES 

CAPITAL  STOCK  OF  X  Y  Z  COMPANY  ISSUED  AND  OUTSTANDING  $250,000.00 

CURRENT  LIABILITIES: 

Bank  Loans  $  50,000.00 

Accounts  Payable  85,000.00   135,000.00 


SURPLUS  100,000.00 


Total  Liabilities,  Capital  Stock,  and  Surplus         $485,000.00 


ANSWERS  TO  QUESTIONS 

Answer  to  Questions  14B-147 — 

(a)  Examine  voucher  and  check,  together  with  bill  of  Rapid  Typewriter  Co. 
showing  purchase  price  of  new  machine  and  exchange  value  of  the  old  one.   The 
Property  account  should  contain  the  cost  price  of  the  new  typewriter.   The 
original  coat  of  the  replaced  typewriter  should  be  credited  to  Property,  and 
the  loss  on  the  exchange  charged  to  Depreciation  Reserve  (if  provision  has 
been  made)  or  Operating  Expense. 

Copyright,  1919,  The  Ronald  Press  Company 


II-29-8 

(b)  Require  deed  and  abstract  of  title.   If  there  is  any  question  in 
regard  to  title  or  incumbrance,  demand  a  certificate  from  the  firm's  attorney. 
Also  examine  the  voucher  and  check  representing  payment. 

(c)  Ask  for  contract  with  Automatic  Sprinkler  Co.,  which  will  give  in- 
formation as  to  purchase  price  and  mode  of  payment.   Examine  voucher  and  check 
showing  the  instalment  payment.   The  total  cost  of  the  system  should  appear 

as  a  charge  to  Property  and  the  unpaid  instalments  should  be  set  up  as  a 
liability. 

(d)  Examine  contract  for  the  purchase  of  stumpage,  which  will  give  the 
purchase  price  ;  also  examine  voucher  and  check. 

(e)  Ask  for  "bought  bill"  of  Safety  Trust  Co.,  as  well  as  voucher  and 
check  showing  payment,  and  call  for  the  bonds  purchased. 

(f)  Analyze  material  and  labor  charges  to  see  if  they  are  made  at  cost. 
Note  whether  a  percentage  for  overhead  has  been  included  and,  if  so,  the 
character  of  the  items  making  up  the  overhead.  Note  whether  an  interdepart- 
mental profit  has  been  added. 

(g)  Thomas  Jones  should  send  weekly  reports  of  his  expenses  to  the  office. 
These  can  be  supported  by  hotel  and  other  receipts.   They  should  be  approved 
by  some  official  whose  duty  it  is  to  supervise  the  traveling  expenses  of  the 
salesmen.  Examine  voucher  and  check. 

(h)  Examine  duplicate  discount  memorandum  and  note  whether  credit  has  been 
received  in  the  pass  book.   If  there  is  question  as  to  whether  the  note 
actually  was  discounted,  communicate  with  the  bank. 

Answer  to  Question  148 — Stamp  or  otherwise  cancel  each  voucher  when 
audited.   The  imprint  commonly  used  contains  the  name  of  the  auditing  firm, 
nam©  or  initials  of  the  audit  clerk,  and  the  date  of  the  audit. 

Answer  to  Question  149 — A  voucher  and  voucher  check  should  support  each 
payment.  Examine  the  voucher  check  as  to  date,  indorsements,  amount,  and 
signature  of  drawer  of  check.   To  the  voucher  or  voucher  check  should  be  at- 
tached the  documentary  evidence  upon  which  the  payment  is  authorized,  such  as 
invoice  from  creditors,  notes  paid,  etc.   These  should  be  examined  as  to  date  and 
nature  of  items  in  invoice.   Invoices  should  bear  the  following  certificates: 

1.  Receipt  of  goods  by  receiving  clerk 

2.  Prices  and  terms  0  K  by  purchasing  agent 

3.  Extensions  and  footings  0  K  by  bookkeeper 

4.  Payment  approved  by  proper  authority 

Usually  bank  statements  and  pass  books  do  not  bear  the  certification  of 
the  bank  as  to  the  balance  to  the  credit  or  debit  of  an  account  at  a  certain 
date.  Moreover,  an  auditor  is  not  in  a  position  to  know  that  the  bank  state- 
ment handed  him  and  purporting  to  be  the  one  submitted  by  the  bank  is  genuine. 
Therefore,  out  of  precaution  an  auditor  usually  requests  that  a  certificate, 
over  the  signature  of  a  responsible  officer  of  the  bank  be  furnished  him  as  to 
the  balance,  in  a  certain  account  at  a  given  date. 


Copyright,  1919,  The  Ronald  Press  Company 


II-29-9 

Answer  to  Question  150— 

(a)  In  order  to  vouch  allowances  made  to  customers,  the  auditor  should 
test  entries  of  any  consequence  with  credit  memoranda  and  refer  to  the  cor- 
respondence or  to  any  other  evidence  available.   The  allowances  should  be 
footed  and  the  totals  checked  with  the  general  ledger.   In  addition  it  should 
be  seen  that  the  allowances  are  properly  authorized  by  responsible  officials, 

(b)  In  order  to  vouch  calls  in  arrear,  the  balances  on  the  shareholders' 
accounts  in  the  share  ledger  should  be  checked  and  agreed  with  the  balances 
shown  as  outstanding  on  the  call  accounts  or  unpaid  instalment  accounts  in  tho 
general  ledger.   In  addition,  statements  might  be  mailed  to  the  subscribers 
following  the  procedure  outlined  for  trade  customers, 

REFERENCES ! 

Montgomery,  pages  530-572 
Wildman,  pages  178-186 


Copyright,  1919,  The  Ronald  Presa  Company 


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P.       L.       BARWaS       ARC       COMPANY 
B.        STORY       MANUFACTURING        COMP  A.N  Y 


CONSOLIDATED  3TATMSNT  OF  PROFIT  AND  L0S3 
YgAR  SNDING   DBGlftlBSR   31.    1918 


Par  t  1  c  u  1  a  r  B 

GROSS  SALES 

less-  Discounts,  Returns  and  Allowances 

Net  Sales 

ISSS-  COST  OF  SAI2S 

Grose  Profit  from  Sales 
ADD: 

Income  from  Restaurant 
Miscellaneous  Income 


Anount 


508.68 
26.78 


Gross  Profit  from  Operations 

JJ5S3-f  SELLING  AND  GBNEBAL  EXPENSES » 

lifagazine  Advertising  $11,876.07 

Newspapef  Advertising  6,178.29 

Uiscelianeous  Selling  Expenses  6.167.03 

Officers'   Salaries  16,660.00 

Office  Salaries  14,447.01 

Rent  3,204.99 

Inventory  Depreciation  1,558.18 

Bad   Debts  702.79 

Miscellaneous  General  Expense  2,049.72 


Net  Profit  from  Operations 


LESS: 

Interest  paid 
Interest  received 


t  9 


.430.17 

551.76 


Surplus  Net  Profit  before 
providing  for  Federal  Taxes 


IBSSr  RESERVE  FOB   FEUBBAl  TAXES 
Final   Net  Profit 


Which  is  Accounted  for  Thus: 
Minority  Stoclrholder8»   Interest 
Provision  for  Sinking  Fund  Reserve 
Balance  •  Carried  to  Surplus  Account 


f  441,817. 62 
85,094.05 

$356,723.67 

262,151.62 

i  94.572.06 

336.46 
i  94.907.61 


62.834.13 
$  32.073.38 

8,878.41 

$  23. 194; 97 

2,627.44 

$  20,567.53 


#  448.24 
10,000.00 
10,119.29 

i  20,667.63 


Copyright,  1919,  The  Ronald  Press  Company 


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II-30-1 


O 


COMPLETE  ACCOUNTING  COURSE— PARI  II 
Lecture  30 

REVIEW  PROBLEMS  AND  QUESTIONS 


Question  156 — 

(a)  State  the  object  for  which  a  statement  showing  change  in  financial 

condition  is  prepared, 

(b)  Draft  two  forms  commonly  used. 

Question  157— 

(a)  What  is  a  statement  of  charge  and  discharge? 

(b)  State  the  purpose  for  which  this  statement  is  prepared 

(c)  Draft  same 

Question  158 — 

(a)  What  is  a  trustee's  cash  account? 

(b)  Draft  same 

Question  159 — Outline  a  method  of  presenting  the  accounts  of  a  trustee  or 
executor  without  the  use  of  a  statement  of  charge  and  discharge. 

Question  160 — Explain  the  following  terms  commonly  used  in  estate 
accounting: 

(a)  Principal 

(b)  Corpus 

(c)  Income 

(d)  Testator 

(e)  Intestate 


(f)  Legatee 

(g)  Life  tenant 
(h)  Remainderman 
(i)  Beneficiary 
(j)  Advances 


(k)  Apportionment 

(1)  Estate 

(m)  Trustee 

(n)  Executor 

(o)  Administrator 


Question  161 — 

(a)  Outline  your  conception  of  the  distinction  between  principal  €uid 

income  as  applied  to  estate  accounting. 

(b)  In  what  way,  if  any,  does  this  differ  from  industrial  or  com- 

mercial accounting? 

Question  162 — 

(a)  What  is  a  consolidated  balance  sheet? 

(b)  What  function  does  it  perform? 

(c)  In  what  way  does  it  differ  from  the  ordinary  balance  sheet  pre- 

pared for  industrial  £ind  commercial  concerns? 

Question  163 — 

(a)  What  is  a  consolidating  working  sheet? 

(b)  State  the  purpose  for  which  it  is  prepared. 
(0)  Draft  form. 

Copyright,  1919,  The  Ronald  Press  Company 


II-30-2 

Question  164 — Explain  the  following  terms  commonly  used  in  connection  with 
consolidated  balance  sheets: 

(a)  Holding  company 

(b)  Subsidiary 

(c)  Controlling  interest 

(d)  Minority  stockholders'  interest 

(e)  Good-will 

(f)  Intercompany  adjustments 

(g)  Date  of  purchase 

Question  165 — 

(a)  What  is  your  conception  of  an  audit? 

(b)  Name  several  kinds  of  audits  giving  the  distinguishing  character- 

istics of  each. 

(c)  State  the  objects  to  be  attained  by  an  audit. 

Question  166 — 

(a)  What  do  you  understand  by  a  "system  of  internal  check"? 

(b)  What  bearing,  if  any,  would  such  systems  have  on  the  auditor's 

work? 

Question  167 — Give  a  brief  outline  of  the  duties  of  an  auditor. 

Question  168 — At  what  stage  of  an  audit  should  cash  and  negotiable  se- 
curities be  examined?  Why? 

Question  169 — An  audit  of  a  set  of  books  for  the  half-year  ending  December 
31  is  begun  on  January  26.   State  the  procedure  you  would  adopt  to  prove  the 
correctness  of  the  cash  on  hand  at  December  31. 

Question  170 — In  an  audit  of  the  accounts  of  a  firm  or  corporation  how  may 
the  cash,  as  shown  by  the  bank  pass  book,  be  reconciled  with  the  amount  called 
for  by  the  cash  book  or  ledger?  After  this  has  been  done,  is  it  necessary  to 
check  the  pass  book  with  the  deposits  as  shown  by  the  cash  book?  What  might 
such  detailed  checking  show? 

Question  171 — Give  a  convenient  method  of  ascertaining  whether  accounts 
receivable  are  good,  bad,  or  doubtful  in  a  concern  with  5,000  open  accounts  at 
the  date  of  the  balance  sheet. 

Question  172 — State  a  method  of  procedure  in  an  examination  of  securities 
consisting  of  bonds,  stocks,  and  bills  receivable. 

Question  2-73 — State  the  precautions  you  would  take  in  verification  re- 
quiring several  days'  work,  of  the  securities  of  an  insurance  company  includ- 
ing both  stocks  and  bonds  in  negotiable  and  non-negotiable  form, 

Questi'on  174 — How  would  you  satisfy  yourself  as  to  the  existence  of  se- 
curities given  as  security  for  a  loan  to  a  company? 

Copyright,  1919,  The  Ronald  Press  Company 


II-30-3 

Question  175 — In  auditing  the  books  of  a  manufacturing  business  that  had  a 
supposedly  highly  developed  cost  system,  what  steps  would  you  take  regarding 
inventory  values  that  were  found  to  agree  with  the  cost  records? 

Question  176 — The  accounts  of  a  steel  and  iron  company  show  large  additions 
to  plant  and  machinery.   It  is  found  that  these  charges  include  considerable 
amounts  from  pay-rolls.  In  the  absence  of  specific  explanations  as  to  pay- 
roll element,  what  method  should  be  employed  by  the  auditor  to  determine  the 
accuracy  and  propriety  of  these  charges? 

Question  177 — Give  the  procedure  you  would  adopt  in  auditing  cash  payments, 
and  state  how  to  prevent  the  reproduction  and  passing  of  vouchers  a  second 
time. 

Question  178 — 

(a)  Under  what  circumstances  should  paid  checks  be  treated  as  vouchers? 

(b)  Are  checks  proper  and  sufficient  vouchers  for  purchases? 

Question  179 — In  examining  cash  vouchers  in  the  course  of  an  audit  is  it 
necessary  to  place  your  initials  or  some  other  distinctive  mark  on  each 
voucher? 

Question  180 — In  an  audit  stipulating  for  the  examination  of  all  vouchers 
of  every  description,  what  would  be  proper  vouchers  for  the  following: 

(a)  Purchases 

(b)  Return  purchases 

(c)  Sales 

(d)  Return  sales 

(e)  Cash  receipts 

(f)  Cash  disbursements 

(g)  Journal  entries 

Question  181 — How  would  you  satisfy  yourself  as  to  whether  the  credits  for 
merchandise  returned  are  bona  fide,  and  not  made  for  the  purpose  of  concealing 
a  shortage  in  cash? 

Question  182 — In  making  an  audit  would  you  consider  it  necessary  to  check 
in  detail  the  postings  of  subsidiary  ledgers? 

Question  183 — Of  what  use  is  the  minute  book  of  a  corporation  to  an 
auditor? 

Question  184 — Should  the  auditor  verify  the  stock  ledger  of  a  corporation? 

Question  185 — In  an  audit  of  the  accounts  of  a  corporation  should  the 
auditor  accept  as  conclusive  the  certificate  of  the  registrar  of  the  stock  as 
to  the  total  amount  of  capital  stock  outstanding? 

Question  186—13  it  the  duty  of  an  auditor  to  examine  the  transfer  books 
of  a  company? 

Copyright,  1919,  The  Ronald  Press  Company 


II-30-4 

Question  187 — Give  the  steps  to  be  taken  to  insure  the  statement  of  the 
full  liability  on  the  following  items  appearing  on  the  balance  sheet: 

(a)  Preferred  cumulative  stock 

(b)  First  mortgage  bonds 

(c)  Collateral  trust  bonds 

(d)  Income  bonds 

(e)  Car  trust  notes 

Question  188 — An  auditor  is  engaged  by  a  man  who  is  buying  an  interest  in  a 
firm,  to  report  upon  the  assets  and  liabilities  of  the' firm  as  at  a  given  date 
and  upon  the  profits  of  the  three  years  just  prior.  Upon  the  auditor's  report 
he  purchases  an  interest  in  the  firm  and  in  its  assets  and  liabilities.   Six 
months  later  it  is  discovered  that  there  were  bills  payable  due  by  the  firm 
amounting  to  $10,000  at  the  time  the  auditor  made  his  examination  and  not 
reported  upon  by  him,  and  that  these  bills  had  continuously  been  due  by  the 
firm  for  one  year  prior  to  such  examination,  but  no  record  of  same  had  been 
made  upon  the  books.   Under  what  circumstances  would  the  auditor  be  considered 
guilty  of  negligence  in  not  discovering  this  fact,  and  under  what  circum- 
stances would  he  be  considered  entirely  free  of  any  blame  in  the  matter? 

Question  189 — In  the  statement  of  the  earnings  of  a  business  to  be  sold  on 
the  basis  of  its  earning  capacity,  how  should  the  question  of  interest  paid 
on  accounts  payable,  on  bills  payable,  and  on  loans  be  treated? 

Question  190 — In  the  case  of  an  audit  of  the  books  of  a  corporation  where 
the  volume  of  transactions  is  so  large  that  a  detailed  checking  of  postings 
and  footings  is  out  of  the  question,  what  course  should  be  pursued  in  the 
examination  in  order  to  insure  the  correctness  of  the  balance  sheet? 


Copyright,  1919,  The  Ronald  Press  Company 


II-30-5 


Solution  to  Problem  62 


MONTAUK  MANUFACTURING  CO. 
STATEMENT  OF  AFFAIRS,  JULY  2,  1919 

ASSETS 

Expected 

Book  Value  To  Realize 

CURRENT  ASSETS: 

S  1,402.00    Cash  $  1,402.00 

2,108.00    Bills  Receivable  2,108.00 

19,740.00    Accounts  Receivable  18,100.00 

35,800.00    Inventories  29,000.00 


%   59,050.00  $50,610.00 


CAPITAL  ASSETS: 
600.00    Office  Fixtures  $   500.00 

7,000.00    Tools  and  Appliances  4,000.00 

50,000.00    Machinery  $30,000.00 

DEDUCT — Partially  Secured  Claim  (per 

contra)  45,000.00 


8,000.00    Boats  $  6,000.00 

DEDUCT — Fully  Secured  Claim  (per  contra)    6,000.00 


4,000.00    Horses  and  Trucks  $  3,000.00 

DEDUCT — Fully  Secured  Claim  (per  contra)    3,000.00 


90,000.00    Factory  Site  and  Buildings  $90,000.00 

DEDUCT — (per  contra) 

Bonds  $90,000.00 

Bond  Interest  2,700.00   92,700.00 


$159,600.00  $  4,500.00 


CONTINGENT  ASSETS: 

Notes  Receivable  Discounted  $   340.00 

$218,650.00  Total  All  Assets  $55,110.00 

DEDUCT — Preferred  Claims  (per  contra)  2,500.00 


Total  Net  Free  Assets  available  for  distribution  among 
creditors  (subject  to  expense  of  realization  and 
liquidation)  $52,610.00 

Balance — Deficiency  to  Creditors  6,890.00 


59,500.00 


$218,650.00  Deficiency  to  Stockholders  (non-assessable)  $27,990.00 

Copyright,  1919,  The  Ronald  Press  Company 


II-30-6 

LIABILITIES 
Gross  Expected 

Liabilities  To  Rank 

PREFERRED  CREDITORS: 
(  2,500.00    Taxes,  Wages,  etc. 

(deducted  per  contra)  $  2,500.00 


FULLY  SECURED  CREDITORS: 
9,000.00    Chattel  Mortgages  $  9,000.00 

(deducted  per  contra)  9,000.00 


PARTIALLY  SECURED  CREDITORS: 
90,000.00    Bonds  (Principal)  $  90,000.00 

2,700.00    Bond  Interest  2,700.00 


$  92,700.00 


DEDUCT — Value  of  Factory  Site  and 

Buildings  (per  contra)  90,000.00  $  2,700.00 


45,000.00    Chattel  Mortgage  $  45,000.00 

DEDUCT — Agreed  Value  of  Machinery 

(per  contra)  30,000.00   15,000.00 


UNSECURED  CREDITORS: 

30,000.00    Bills  Payable  30,000.00 

11,460.00    Accounts  Payable  11,460.00 

Discounted  Notes  Receivable  Dishonored  340.00 

CONTINGENT  LIABILITIES: 

Notes  Receivable  Discounted  $  6,660.00 


$190,660.00  Total  All  Liabilities  $59,500.00 


$100,000.00  Capital  Stock  $100,000.00 

72,010.00*  Deficit  (per  books)  72,010.00   27,990.00 


$218,650.00  $27,990.00 


*  Red. 

Comments  on  Problem  62 

Deficiency  to  stockholders  is  shown  at  $27,990,  on  the  theory  that  the 
stockholders'  equity  per  books  at  July  2,  1919,  was  only  $27,990  and  inasmuch 
as  the  stock  is  non-assessable  the  stockholders  will  not  lose  more  than  their 
equity. 

In  event  the  stock  is  assessable,  the  deficiency  to  stockholders  would  be 
their  equity  of  $27,990,  plus  the  deficiency  to  creditors  of  $6,890  which 
they  would  be  called  upon  to  make  good,  or  a  total  of  $34,880. 

Copyright,  1919,  The  Ronald  Press  Company 


II-30-7 


DEFICIENCY  ACCOUNT 


ESTIMATED  LOSS  ON  REAL- 
IZATION AND  LIQUIDATION: 
Accounts  Receivable  $1,640 
Inventories  6,800 
Office  Fixtures  100 
Tools  &  Appliances  3,000 
Machinery  20,000 

Boats  2,000 

Horses  4  Trucks      1,000 


NOTES  RECEIVABLE  DISCOUNTED 

DISHONORED 
DEFICIT  (per  books) 


CAPITAL  STOCK  OUTSTANDING     $100,000 
DEFICIENCY  TO  CREDITORS  AS  PER 

STATEMENT  OF  AFFAIRS  6,890 


$  34,540 


340 
72,010 

$106,890 


$106,890 


Solution  to  Problem  63 

SOLUTION  SUBMITTED  BY 
PROFESSOR  JOHN  R.  WILDMAN  IN  FEBRUARY.  1913,  ISSUE  OF 
JOURNAL  OF  ACCOUNTANCY 

■It  is  probable  that  circle  swings  are  sufficiently  familiar  to  the 
average  reader  to  require  no  description.   They  have  sprung  into  existence 
and  attained  popularity  within  the  past  fifteen  years.   They  are  now  an  im- 
portant feature  of  most  amusement  parks. 

■This  problem  is  taken  from  a  company  which  was  organized  by  the  man  who, 
it  is  understood,  was  the  inventor  of  the  circle  swing,  and  is  largely  based 
on  facts.   It  illustrates  the  ingenuity  of  an  inventor  who  was  an  organizer 
and  man  of  business  ability  as  well  as  a  mechanical  genius. 

■With  a  sufficiency  of  patents  and  no  funds,  this  man,  who  for  our  purposes 
may  be  called  'Hampton'  set  about  to  organize  a  corporation  and  acquire  the 
entire  capital  stock  thereof  in  exchange  for  patents.  The  details  of  or- 
ganization, such  as  the  paying  in  of  the  small  amount  of  cash  required  and  the 
matter  of  organization  expense,  may  be  passed  over,  since  such  points  have 
been  fully  discussed  in  previous  problems  and  the  purpose  of  the  present 
problem  is  to  bring  out  other  points. 

■With  the  donation  by  Hampton  of  2,499  shares  of  stock  we  are  brought  face 
to  face  with  the  first  debatable  point.   Presumably  no  one  will  dispute  the 
fact  that  the  stock,  from  the  standpoint  of  the  company,  becomes  treasury 
stock,  since  it  complies  with  the  usual  Interpretation  of  the  term  which  holds 
that  treasury  stock  is  such  stock  as  has  been  once  issued  for  value  and  sub- 
sequently acquired.   Parenthetically  it  may  be  noted  that  Hampton,  while  having 
provided  stock  which  may  be  sold  at  whatever  price  it  will  bring,  or  if  desir- 
able, given  away,  has  not  parted  with  the  controlling  interest  in  the  cor- 
poration.  It  is  also  apparent  that  his  object  in  donating  the  stock  was  to 
provide  what  may  be  rather  loosely  termed  'working  capital.' 

Copyright,  1919,  The  Ronald  Press  Company 


II-30-8 

"On  the  question  of  what  account  title  or  interpretation  shall  be  given  to 
the  credit  which  arises  when  treasury  stock  is  debited,  authors,  authorities, 
and  novices  differ.   It  has  been  variously  referred  to  as  Stock  Donation 
account.  Treasury  Stock  Donated,  Treasury  Stock  Suspense,  Working  Capital, 
Capital  Surplus  Suspense,  Surplus  from  Donated  Stock,  etc.  A  consideration 
of  what  it  is  rather  than  what  it  is  called  will  doubtless  be  of  some  interest. 

■The  capital  stock  in  the  amount  of  $500,000  was  originally  issued  for 
patents.   Were  the  patents  worth  $500,000?   Only  future  operations  of  plants 
and  income  derived  therefrom  will  answer  such  a  question.   If  in  the  judgment 
of  the  directors,  this  being  a  New  York  corporation,  such  was  the  value,  their 
judgment  in  the  absence  of  fraud  would  be  conclusive.   If  it  is  conceded  that 
$500,000  was  the  value  of  the  patents,  any  subsequent  donation  of  stock  would 
affect  the  surplus  to  the  extent  of  the  value  of  the  stock.  The  question  of 
this  value  then  becomes  the  second  question  to  be  settled. 

"Any  attempt  to  fix  or  estimate  the  value  of  the  donated  treasury  stock 
would  encounter  ridicule.   Obviously  it  is  worth  what  it  will  bring  upon  sale. 
It  is  therefore  apparent  that  some  temporary  disposition  must  be  made  of  the 
credit  if  an  account  is  to  be  set  up  for  the  treasury  stock.   Of  the  titles 
mentioned  all  are  available  except  Surplus  from  Donated  Stock.   It  should  in 
the  opinion  of  the  author  be  pointed  out  that  this  is  not  yet  surplus.   It  is 
merely  a  bookkeeping  account  set  up  as  an  expedient  for  holding  the  amount  in 
suspense  until  the  exact  amount  of  the  surplus  arising  from  the  donation  is 
determined.   For  this  purpose  Stock  Donation  account  perhaps  serves  as  well  as 
any  other. 

"In  the  problem  under  discussion,  when  the  donated  stock  is  received. 
Treasury  Stock  may  be  debited  in  the  amount  of  $249,900  and  Stock  Donation 
account  credited.   When  the  2,250  shares  are  sold  at  90,  and  225  shares  given 
away  as  a  bonus.  Treasury  Stock  should  be  credited  in  the  amount  of  $247,500 
and  Cash  $202,500,  Discount  on  Stock  $22,500,  and  Stock  Bonus  $22,500  respec- 
tively, debited.   The  accounts  for  Discount  and  Stock  Bonus  might  then,  if  it 
were  desired  to  close  the  books,  or  set  up  a  comprehensive  balance  sheet,  be 
closed  out  to  the  Stock  Donation  account,  the  balance  of  which  ($202,500) 
after  bringing  down  an  amount  corresponding  to  the  inventory  of  treasury  stock 
($2,400)  could  be  closed  out  to  Capital  Surplus  or  to  Profit  and  Loss  Surplus. 
The  former  would  not  be  available  for  dividends,  while  the  latter  "would  be. 
So  far  as  the  author  has  been  able  to  ascertain  after  energetic  research, 
there  is  no  legal  restriction  upon  treating  such  an  item  as  profit  and  loss 
surplus.   So  to  treat  it,  however,  and  pay  it  out  as  cash  dividends  would 
defeat  the  purpose  of  the  donation.   To  its  distribution  as  stock  dividends 
there  could  apparently  be  no  objection. 

"Up  to  this  point  the  question  at  issue  has  been  presented  from  one  point 
of  view,  that  point  of  view  being  taken  by  those  who  would  contend  that  the 
patents  could  be  consistently  valued  at  $500,000.   With  a  view  to  full  discus- 
sion, it  should  be  pointed  out  that  those  who  oppose  this  view  hold  that  the 
donation  of  the  stock  is  in  itself  evidence  that  the  assets  acquired  should 
not  be  valued  at  the  par  value  of  the  capital  stock  issued  for  them.   The 
treatment  of  the  accounts  in  this  case  would  be  the  same  as  previously 
presented  except  that  the  amount  previously  credited  ultimately  to  Capital 
Surplus  or  to  Profit  and  Loss  Surplus  would  be  credited  to  Patents,  thereby 
reducing  the  book  value  of  the  asset.   This  treatment  it  seems  cannot  be 

Copyright,  1919,  The  Ronald  Press  Company 


II-30-9 

consistently  applied  if  the  directors  hold  to  the  contrary  through  their  right 
to  fix  the  value,  but  such  procedure  would  undoubtedly  be  conservative, 

■Still  another  theory  concerning  the  matter  holds  that  the  donation  of 
stock  is  equivalent  to  discounting  the  capital  stock,  and  such  theorists  would 
debit  Discount  on  Stock  and  credit  Patents  in  the  amount  of  the  donation.  One 
of  the  earlier  legal  decisions  in  the  matter  holds  such  a  transaction  to  be 
evidence  of  discount,  or  issue  below  par;  but  the  courts  have  latterly  held  the 
contrary.   If  such  an  entry  as  was  above  noted  should  be  made  it  is  evident 
that  treasury  stock  would  not  appear  on  the  books,  but  that  sales  of  the  stock 
would  be  debited  to  Cash  and  credited  to  Discount  on  Stock.   It  is  presumed 
that  the  balance  of  the  Discount  account  would  be  written  off  against  profits 
over  a  period  of  years. 

■The  journal  entries  required  by  the  problem  are  as  follows: 


Patents 

To — Capital  Stock  Outstanding 


$500,000.00 


$500,000.00 


Treasury  Stock 

To — Stock  Donation  Account 


249,900.00 


249,900.00 


Cash 

Discount  on  Stock 

Stock  Bonus 

To — Treasury  Stock 


202,500.00 
22,500.00 
22,500.00 


247,500.00 


Stock  Donation  Account 

To — Discount  on  Stock 
Stock  Bonus 
Capital  Surplus 


247,500.00 


22,500.00 

22,500.00 

202,500.00 


Cost  of  Swings 

To — Accounts  Payable 
Cash 


118,634.50 


73,247.92 
45,386.58 


Accounts  Payable 
To— Cash 


50,000.00 


50,000.00 


Privileges  (1912) 
To — Cash 


Cash 


To — Income  from  Swings 

Coney  Island  $12,273.85 

Atlantic  City  2,863.15 

Port  George  6,743.35 


12,000.00 
21,880.35 


12,000.00 
21,880.35 


121,880.35 
Copyright,   1919,   The  Ronald  Press  Company 


11-30-10 


Cash 


To — Cost  of  Swings 
Profit  and  Loss 


$  50,000.00 


$  39,544.83 
10,455.17 


Salaries  and  Expenses 
To — Cash 


18,787.59 


18,787.59 


Accounts  Payable 
To—Cash 


23,247.92 


23,247.92 


Privileges  (1913) 
To — Cash 


2,000.00 


2,000.00 


Profit  and  Loss 

To — Privileges  (1912) 

Salaries  and  Expenses 


30,787.59 


12,000.00 
18,787.59 


,  Income  from  Swings 

To — Profit  and  Loss 


21,880.35 


21,880.35 


Profit  and  Loss 

To—Profit  and  Loss  Surplus 


1,547.93 


1,547.93 


ASSETS 


Equipment  (cost) 

Patents 

Treasury  Stock 

Cash 

Privileges  (1913) 


.  THE  HAMPTON  CIRCLE  SWING  CO. 
BALANCE  SHEET,  SEPTEMBER  30,  1912 

LIABILITIES  AND  CAPITAL 
$  79,089.67  Capital  Stock  Outstanding   $500,000.00 


500,000.00  Stock  Donation  Account 

2,400.00  Capital  Surplus 

122,958.26  Profit  and  Loss  Surplus 
2,000.00 


$706,447.93 


2,400.00 

202,500.00 

1,547.93 


$706,447.93 


Copyright,  1919,  The  Ronald  Press  Company 


11-30-11 

ANSWERS  TO  QUESTIONS 
Answer  to  Question  151 — 

The  Net  Profits  of  the  Corporation  amount  to  $337,193.08 

DEDUCT-- Interest  on  Mortgage  Indebtedness; 

Interest  on  4%  Mortgages  $20,000.00 

Interest  on  6%  Mortgages  45,000.00    65,000.00 


Balance — Surplus  Net  Profits  available  for  Dividends  $272,193.08 


The  proposed  Dividend  of  Q%   on  Capital  Stock  of 

$5,000,000  is  equivalent  to  $300,000.00 

DEDUCT — Surplus  Net  Profits  for  year  available  for  Dividends        272,193.08 


Balance — representing  amount  of  Surplus  at  beginning  of  year 
required  to  be  appropriated  in  order  to  pay  the  proposed 
Dividend  $  27,806.92 


The  Surplus  or  Undivided  Profits  at  that  date  amount  to  $  27,806.92 


It  will  be  seen,  therefore,  from  the  foregoing  that  it  is  necessary  to 
appropriate  all  of  the  undivided  profits  or  surplus  at  the  beginning  of  the 
year  in  order  to  pay  the  proposed  dividend. 

Answer  to  Question  152 — If  a  periodical  provision  for  depreciation  is  not 
called  for  by  the  by-laws  or  minutes  of  the  board  of  directors,  it  is  not 
legally  necessary  to  provide  for  depreciation  of  a  wasting  asset.  Whether  it 
is  conservative  business  policy  to  do  so  is  another  question  which  must  be 
decided  in  each  case  as  it  arises. 

Where  a  company  is  organized  to  exploit  a  wasting  asset  and  will  cease  to 
exist  when  its  main  asset  is  exhausted,  it  appears  from  both  a  legal  and  ac- 
counting point  of  view  that  no  depreciation  need  be  provided.   In  such  cases 
the  stockholders  must  realize  that  each  dividend  received  constitutes  a 
partial  return  of  capital  invested  as  well  as  earnings. 

Where  a  company  is  organized  to  exploit  wasting  assets  and  new  assets  are 
to  be  acquired  when  the  original  ones  are  exhausted  it  appears  essential,  at 
least  from  an  accounting  point  of  view,  to  provide  periodically  for  deprecia- 
tion.  If  this  be  not  done,  when  the  original  cemetery  lots  are  sold  the 
company  will  find  its  asset  exhausted  and  no  funds  available  for  the  ac- 
quisition of  another  asset.   And  it  may  be  extremely  difficult  at  that  time 
to  obtain  such  funds  from  its  then  stockholders  who  in  all  probability  may  not 
be  the  same  individuals. 


Copyright,  1919,  The  Ronald  Press  Company 


11-30-12 

Answer  to  -Question  155 — Some  of  the  closing  entries  in  the  case  of  a 
partnership  are  as  follows; 

(1) 

Partners'  Salaries  $ 

To — A — Drawing  Account  $ 

B — Drawing  Account  — — 

Partners'  salaries  as  per  partnership  agreement. 

(2) 

Interest  on  Capital  Accounts  

To — A — Drawing  Account  

B~Drawing  Account  — — 

Interest  on  capital  accounts  per  partnership 
agreement, 

(3) 

All  Income  Accounts  (detail)  — ~ 

To — Profit  and  Loss  Account  

All  Expense  Accounts  (detail)  

Partners'  Salaries  

Interest  on  Capital  Accounts  

To  close  l^alances  of  nominal  accounts* 

(4) 

Profit  and  Loss  Account  

To — A — Drawing  Account  

B — Drawing  Account  

To  close  Profit  and  Loss  account. 

(5) 

A — Drawing  Account  — — — 

B — Drawing  Account  — — 

To — A — Capital  Account  

B~Capital  Account  


Comments 

1.  Entries  1  and  2  would  of  course  only  be  made  in  the  event  the 
stipulations  in  the  partnership  agreement  required  that  these  features  be 
dealt  with. 

2.  It  may  be  necessary  to  introduce  entries  in  respect  of  proportion  of 
commission  earned  on  incomplete  work,  or  preferential  allowances  on  the 
business  brought  in  by  each  partner. 


Copyright,  1919,  The  Ronald  Press  Company 


11-30-13 

Answer  to  Question  154 — Assuming  a  complete  investigation  is  necessary, 
the  following  will  be  the  course  of  procedure: 

1.  The  cash  book  should  be  footed  and  vouched  in  detail  and  cer- 

tificates obtained  of  the  opening  and  closing  bank  balances, 

2.  The  pass  book  should  be  checked  completely  with  the  cash  book, 

particular  attention  being  paid  to  the  dates  when  the  receipts 
are  paid  in,  and  to  ascertain  that  each  day's  receipts  are 
included. 

3.  If  possible,  the  original  deposit  slips  from  the  banlf  should  be 

obtained  and  compared  with  the  cash  book. 

4.  All  discounts  of  £iny  consequence  should  be  tested. 

5.  Where  a  mailing  department  record  of  cash  receipts  has  been  kept, 

these  should  be  compared  with  the  cash  book. 

6.  It  should  be  seen  that  the  proceeds  of  all  notes  receivable  have 

been  duly  received  and  notes  and  other  securities  in  hand  should 
be  examined. 

7.  As  regards  cash  payments,  special  care  should  be  taken  in  examining 

the  vouchers  to  note  any  that  appear  to  be  irregular;  and  it  is 
advisable  that  the  returned  checks  and  indorsements  thereon  should 
be  examined.   In  the  case  of  any  vouchers  being  missing,  dupli- 
cates should  be  obtained.   All  amounts  charged  to  the  drawing 
accounts  of  the  officials  and  employees  should  be  vouched  by  them 
as  being  correct. 

8.  The  petty  cash  book  should  be  vouched  and  footed,  as  this  is  a  very 

likely  source  of  fraud.   Special  attention  must  be  paid  to  salaries 
and  wages,  and  the  accountant  should  ascertain  that  the  names  of 
all  the  employees,  and  the  amounts  received  by  them,  are  correct, 

9.  If  it  is  possible  for  circulars  to  be  sent  out  to  the  debtors,  it 

should  be  done  as  this  is  the  best  method  of  confirming  the  valid- 
ity of  the  outstanding  balances. 

10.  Special  attention  should  be  paid  to  vouching  allowances,  bad  debts, 

and  returns, 

11.  Vouch  cash  sales  with  all  evidence  possible. 

12.  Vouch  entries  in  audited  voucher  record.  Duplicates  should  be  ob- 

tained of  missing  invoices  and  the  creditors'  statements  compared 
with  the  balances  as  shown  by  the  creditors  ledger. 

13.  Check  stock  certificate  book. 

Answer  to  Question  155 — The  directors'  remuneration  is  commonly  fixed  by  the 
by-laws  and  in  such  cases  should  be  perused  to  determine  the  Eimount  to  be  paid 
and  whether  it  is  payable  to  all  directors  or  only  to  those  present.  If  the 
point  is  not  covered  in  the  by-laws  the  amount  to  be  paid  and  to  whom  it  should 
be  paid  would  be  stipulated  by  a  resolution  adopted  by  the  board  of  directors. 
The  minute  book  would  give  the  names  of  the  directors  present  at  each  meeting* 


Copyright,  1919,  The  Ronald  Press  Company 


11-30-15 


Arthur  Andersex  &•  Co 

CEMTIFieO  PIJBUC  ACCOUITXAirTS 


MII.VIAVKEE 


W.  C.  WCVCI* 


MtMKMtm    TJiUST.BtTXUXnrO 

CiucAGO    March  X,   1919. 


Ur*     f.   L.  Barnes,  President » 

F*   L.   Barnes  and- Coiapany, 

72  W.   Adams  Street, 

ChicagOf   111. 
Dear  Sir: 

As  instructed,  we  have  audited  the  books  and  accounts'  of  F.  L* 
Barnes  and  Company  for  the  year  ending  Decemher  31,    1916^  and  submit  herewith 
our  report  thereon  together  with  t'he  following  exhibits  showing  the*  financial 
position  on  that  date  and  the  results  from  operation  for  the  year: 


Consolidated  Balance  Sheet   -  F.   L.   Barnes  and 
Company  and  D.   B.    Story  Jiianufacturing 
Cotapany  at  December  31,    1918 


Bxhibit 


Consolidated  Statement  of  Profit  and  Loss  • 
F.  L%  Barnes  and  Company  and  D.  B.  Story 
Manufacturing  Company  for  year  ending 
December  31,  1918 


Zxhibit     II 


Comparative  Balance  Sheets-  F.   L.   Barnes  cmd 
Company  at  December  31,    1917>  and 
December  31,    1918 


Bxhibit  III 


Comparative  Statements  of  Profit  and  Loss 
F.  L.  Barnes  and  Company  years  ending 
December  31,  1917,  and  December  31,  1918 


Ixhiblt  IV 


Comparative  Statements  of  Cost  of  Sales  * 
F.  L.  Barnes  and  Company  years  ending 
December  31 ,  1917,  and  December  31 ,  1918 


Exhibit     IV-a 


Ad.lustlng  Journal  Entries  necessary  tc  bring 
books  into  accord  with  auditor's  report 


Exhibit 


Copyright,  1919,  The  Ronald  Press  Company 


11-30-16 


-2- 

PROFITS  FROM  OPERATION 

The  results  from  operations  of  P.   L.  Barnes  and  company 

for  the 

years  1917   and  1918  are  shown  in  the 

following  condensed  summary: 

Fart   iculars 
Net  Proceeds  from  Salea 

Year  Ending  December  31 
1917                1918 

Increase 

or 
Decrease  * 

$58,160.96 

$256,148.03 

$314,308.99 

Factory  Cost  of  Goods  Sold 

Gross  Profit   on  Sales 
%  to  Sales 

190,726,62 

231,806.85 

41,080.23 

$  65,421.41 
25.54 

$  82,502.14 
26.25 

$17,080.73 
*71 

Add-  Miscellaneous  Income 

Total  Income  and  Profits 
from  all    sources 
%  to  Sales 

^.243.88 
.— '>^3», . 

$  68,665.29 
26.81 

2,128,42 

1,115.46 

$  84,630.56 
26.93 

$15,965,27 
.12 

Selling  and  General  Expenses 
%  to  Sales 

net  Profit  from  Operations 
%  to  Sales 

De  duct- 
Interest  on  Borrowed  Money 
Interest  Received 

Surplus  Net  Profits  "before 
Federal  Taxes 

42,540.74 
16.61 

52,992.86 
16.86 

10,45"2-.12 
.25 

$  26,124,55 
10.20 

$  31,637.70 
10.07 

$  5,513.15 

$     8,321.18 
81.82 

$     9,430.17 
511.76 

$     8,918.41 

$  1,108.99 
429.94 

$     8,239.36 

$       679,05 

$  17,885,19 

$  22.719,29 

$   4,834,10 

Deduct-  Estimated  Federal  Taxes 
Pinal  Net  Profits 

1,000.00 

2,600.00 

1,600.00 

$   15,885.19 

$  20,119.29 

$  3,234.10 

The  F.inal  Profits  of  $20,119.29  for  1918 

are  accounted  for  as 

follows: 

Ist  Mortgage  Bonds  Sinking  Fund  Reserve 
Free  Surplus 

As  above 

$10,000.00 
10,119.29 

$20,119.29 

♦  Red. 

Copyright,  1919,  The  Ronald  Press  Company 


11-30-17 


-3- 

Froo  the  above,  the  oouscb  of  the  increase  of  f3,334.10  In  Final 
Net  Profits  may  be  set  forth  as  foliowe: 


Increase  in  Gross  Profits  due  to  Increase  in 

Sales    (35.54^  of  058,160.96) 
Increase   in  Gross  profits  due  to  Decrease  in 

Cost  of  Sales   (.71^  of  $314,308.99) 

Total  Increase  in  Gross  Profits  from  Sales 

Decrease  in  profits  of  D.  B.  Story 
Manufacturing  Company 
Less-  Increase  in  Miscellaneous  Income 

Net  Increase  in  Total  Income  and  Profits 

Less- 
Increase  in  Advertising  and  Other 

Selling  E}q>enses 
Increase   in  General  Expenses 

Increase  in  Net  Profits  from  Operations 

Increase  in  Interest  Paid 

Less-   Increase   in  Interest  Received 


Increase  in  Provision  for  Federal  Taxes 
Net  Increase  in  Final  Net  Profits 


$1,450.93 
335.46 


14,918.33 
5,533.89 


$1,108.99 
439.94 

$     679.05 
1.600.00 


$14,854.58 

3,336.15 

il7,080.7aE 

1,115.46 
$15,965.37 

10,453.13 
$  5,513.15 


3,379.05 
$  3,334.10 

SSSBSBSKSS 


The  volume  of  sales  has  increased  materially  during  the  year,  as 
may  be  seen  from  the  following  table: 


Increase  or 

1-9  17 

1^18 

Decrease* 

Style 

Number 
17 

Amount! 
$    937.00 

Number 
7 

Amountt 

Numbe 
*10 

r  Amountt 

160 

$    366.00 

*$   571.00 

181 

778 

48,073.19 

1,176 

73,533.31 

398 

34,451.13 

183 

800 

60,749.13 

881 

66,545.46 

81 

.5,796.34 

185 

1,139 

98,498.33 

1,303 

111,606.06 

163. 

13,107.73 

187 

447 

43,988.81 

634 

59,439.05 

177 

16,450.34 

Specials 

43 

3,343.03 

51 

4,351.41 

9 

908.39 

Visoellaneous 

- 

3,133.76 

- 

738.70 

- 

•3,394.06 

Total 

3,333 

$357,731.33 

4,041 

$315,469.99 

818 

$57,748.76 

Less-  Returns 

and 

Allowances. 

- 

1,573.30 

- 

1,161.00 

- 

•  413.30 

bet  Sales 

3,333 

$356,148.03 

4,041 

$314,306.99 

818 

$58,160.96 

carsT; 

ss»s=:=t:eEBB 

■  S£  =  S 

■■srwsrsrsr 

era 

BBS=S==S=r 

•  Red. 

f  After  deducting  discounts  Improved  Kitchen  Cabinet  Company. 


Copyright,  1919,   The  Ronald  Press  Company 


11-30-18 


-4- 

In  connection  with  Bschibit  iv-a  which  compares  the  coat  of  ealee 
for  the  yeare  1917  and  1918  we  desire  to  call  your  attention  to  the  follow- 
ing points: 

(1)  Increased  prodiiction  has  not  materially  increased  factory 
overhead.  Heat,  Light  and  Power  has  even  decreased,  owing  to  the 
purchase  of  a  cheaper  grade  of  coal. 

(2)  The  ratio  of  factory  overhead  to  direct  lahor  was  103,9^ 
in  1917  as  compared  with  82.66^  in  1918,  This  is  explained  by  the 
fact  that,  although  materials  and  direct  labor  both  increased 
approximately  30^  in  1918  as  compared  with  1917,  factory  expenses 
increased  but  3^. 

(3)  The  amount  of  factory  overhead  in  work  in  process  and 
finished  stock  was  determined  in  the  inventory  of  December  31,  1918 
by  applying  the  ratio  of  total  factory  expenses  for  the  year  to 
total  direct  labor  for  the  year.  This  ratio  was  82.48:^,  the  small 
difference  resulting  when  compared  with  the  percentages  appearing 
in  (2)  being  caused  by  minor  adjustments  in  the  accounts  after  com- 
puting the  latter. 

(4)  The  increase  in  gross  profits  attributable  to  the  propor- 
tionate decrease  in  cost  of  sales  is  ^2,226,15,  as  shown  in  the 
above  profit  and  loss  analysis. 

The  increase  in  selling  and  general  expenses  is  due  principally  to 
the  increase  in  both  newspaper  and  magazine  advertising,  and  to  the  increase 
in  officers  and  office  salaries.   It  may  be  added,  however,  that  in  view  of 
increased  sales  the  increases  in  these  items  are  normal* 

A  consolidated  income  statemsntr  will  be  found  in  Exhibit  II. 


BALANCE  SHEET 
A  consolidated  balance  sheet  appears  in  Exhibit  I  showing  the  com> 
bined  financial  strength  of  P.  L.  Barnes  and  Company  and  its  subsidiary,  the 
D,  B.  Story  Manufacturing  Company,  at  December  31,  1918.  However,  as  the 
financial  policies  of  the  two  companies  are  quite  separate  -  there  having 
been  no  intercompany  transactions  during  the  year  1918  -  our  remarks  are  here 
confined  to  the  Isalance  sheet  of  F,  L.  Barnes  and  Company  appearing  in  com- 
parative form  in  Exhibit  III. 


Copyright,  1919,  The  Bonald  Press  Company 


11-30-19 


-5- 

CASH  ON  HAND  AND   IH  BANK  -   »14.633.83; 

Ve  reconciled  the  book  balances  of  cash  an  bank  with  the  "balance 
certified  to  by  the  bank.     Petty  cash  of  $500.00  was  verified  and  traced 
back  satisfactorily  to  Decenber  31,    1918. 

LIBERTY  BONDS   -   820.000.00; 

There  are  fib, 000.00  of  the  Third  Issue  on  hand  fully  paid  for  and 
subscription  receipts  for  $10,000.00  of  the  Fourth  Loan  one-half  of  which  has 
been  paid.     The  resiaining  instadmeivtB  of  $2,500.00  each  were  paid  on  January 
16    and  January  30,   1919   respectively. 

ACCOUNTS  AND  NOTES  RECEIVABLF  -   $14,031.32 
RBSERVE  FOR  BAD  DEBTS 502.40; 

We  carefully  exajnined  the   outstanding  acoounts  and  notes,   and  the 

reserve,   ve  believe,    is  ample  to  cover  any  losses  from  uncollectible  accounts 

It  will  be  of  interest  to  note  that  the  accounts  receivable  of 
$10,050.22  were   charged  as  follows; 


September  1918 
October 
November 
December 


$         12.55 

513.45 

1,768.12 

7,756.10 

$10,050.22 


INVENTORIES  -   $127,846.62 

LB3S-  RESERVE  FOR  LOSS  ON   INVENTORIES  -        .  3.192.76; 

Ve  made  thorough  checks  on  extensions,   footings  and  pricings  and 

are  pleased  to  state  that  we   found  the   inventory  well   taken  and  carefully 

handled  throughout.      On  the  principle  of  cost   or  market,   which  ie  the   lower, 

we  provided  email   additions  to  the   inventory  rewerve,   one  to  reduce  the  cost 

of  lumber  purchased  to  market   (see  Adjusting  Journal  Bntry  3)   and  another  to 

provide  for  losses  on  sales  of  obsolescent   styles  (see  Adjusting  Journal 

Bntry  4). 

All  other  goods  on  band  are  of  recent  purchase  and  manufacture  and 
represent   saleable   stock.     Responsible   officials  have  certified  to  the 


Copyright,   1919,  The  Ronald  Press  Company 


11-30-20 


•6- 

correctneBB  of  the  inventory  (a)  taken  by  actual  count,  weight  and  measure, 
(b)  condition  of  stock,  and  (c)  valuation. 


INVESTMENTS  IN- 

D.   B.    STORY  MANUFACTURING   COMPANY  -  $33,056,84 
.     IMPROVED  KITCHEN  CABINET   COMPANY     -      19.000,00; 

The  first   of  tneee  accounts  is  made  up  as  follows: 


Jan.      1,  1917       200  Shares  (out  of  aUotal  out- 
standing of  250)    ai  150 
Dec.   31,    1917       Pour-fifths  of  1917  Profits 
Dec.    31,   1918       Pour-fifths  of  1918  Profits 


Lesb-  Dividends  received  as  follows: 
July  1,    1917       Casn  Dividend 
July  1,   1918       Cash  Dividend 

Balance  December  31,   1918 


|1,000.00 
1.000.00 


$30,000.00 
3,243.88 
1,792.96 

$35,036.8.4 


2,000.00 
$33,036,84 


The  investment  in  the  Improved  Kitchen  Cabinet  Company  (   a  selling 
organization)   represents  the  total  coat   of  191     shfires  out  of  a.  total  ^issued 
and  outstanding  of  500  shares.     Ho  dividends  have  as  ^et  been  declared  by 
thin  company. 

CASH  AND  SECURITIES  IN  HANDS  OP 

S  INK  INC..  .FUND^  TRU  STEB  -   $2  0 .  410. 7  7 : 

A  statement  v/as  obtained  frozn;  the  Atlas  Trust  Company,  trustee 

under  the  trust   indenture,   certifying  that  the  following  was  in  their 

possession  on  December  31,   1918: 


Cash 

Liberty  Bondfe-   let   Issue 
(par  $10,300.00) 


$10,316.77 

10,094.00 

$20,410.77 

cs=  =  =  =  =  ss=s 


The  trust  deed  provides  that  at  the  close  of  each  calendar  year  the 
company  shall  turn  over  to  the  Sinking  Pund  Trustee  the   sum  of  $10,000,00  in 
cash  which  may  be  invested  by  the  Trustee  at.  his -discretion  in  Government 
Bonds  only, 


A 


Copyright,  1919,  The  Ronald  Press  Company 


11-30-21 


-7- 

We  eatlBfled  oureelvea  that  these  and  other  provisions  of  the  trust 
Indenture  have  been  fully  complied  with. 

LAMB,  BUILDINGS,    MACHIKBRY«   EQ,UIPUENT 

AND   FIXTURES  -   ♦254,591.93 

LESS-  RESERVE  FOR  DEPRECIATION   -        54.470«28; 

The  changes  that  have  taken  place  in  the  Capital  Asset  Accounts 

during  the   year  1918  may  be   summarized  as  follows: 

Additions 
Balance  During  Balance       Reserve  for  Book  Value 

Account  Jain.   1   1918  Year  Dec. 31  1918  Depreciationpec.31    1918 

Buildings  $  89,722.27  |10, 060.11  $  99,782.38   $10,640.54  $  89,141.84 

Building  Equipment  8,854.52  500.00  9,354.52        3,789.35          5,565.17 

Machinery  108,951.36  1,262.72  110,214.08      39,234.16        70,979.93 
Office  Furniture 

and  Fixtures  2,208.20  782.75  2,990.95            806.24          2,184.71 

Land  32,250.00  -  32,250.00              -                 32,250.00 

Total  $241,986.35   $12,605.58  $254',591.93  $54,470.28   $200^121.66 

Ve  examined  the  vouchers   supporting  th^  purchase  of  these  assets 
and  in  our  opinion  they  have  been  correctly  charged  at  cost  to  the  above 
accounts.      Depreciation  has  been  computed  on  the  basis  of  3^  for  buildings, 
10$&  for  building  equipment   and  machinery,    and  15^  for  office  furniture   and 
fixtures.     It  «ill  be  noted  that   the' larger  part  of  the  machinery  taken 
over  from  F.  L.  Barnes  and  Sons  was  valued  at  a  depreciated  figure  whioh 
was  said  tc  average  approxiniately  90f^  of  the  original   cost,  and  that  the 
actual  depreciation  rate  on  this  basis  is  only  9^. 

Depreciation  was  provided  for  during  1918  as  follows: 

Asset  Pate  Amount 

Buildings  3%  $  2,691.67 

Building  Equipment  1(^  885.46 

Machinery  1(9(  10,965.14 

Office  Equipment  15^  331.23 


Total  Provision  $14,873.49 

sssacssssa 

In  our  opinion  the  rates  and  the  amounts  so  fau:*  provided  ta^ 


adequate. 


Copyright,  1919,  The  Ronald  Press  Company 


11-30-22 


-8- 

CURRBKT  LIABILITIES  «  $103.906. 58; 

So  far  ae  we  were  able  to  ascertain  all  liabilities  at  December  31, 
1916  have  been  given  expression  to  on  the  books  of  account  on  that  date  and 
in  the  attached  exhibits. 

CAPITAL  STOCK  -  ♦250.000.00; 

Un issued  stock  was  sold  during  the  yeaa  at  par  amounting  to 
$20,000.00.  There  were  no  transfers  in  1918. 


The  book  values  per  ahare  at  December  31,  1917  and  December  31, 


1918  were; 


Part  icularg 

Capital  Stock 
Surplus 

Sinking  Fund  Reserve  • 
let  Mortgage  Bonds 

Total  Book  Value 

Book  Value  per  share 


December  31 
19  17  19   18 


$230,000.00  $250,000.00 
27,342.99  26,707.57 

10,000.00  20,410.77 

$267,342.99  $296,118.34 

$116.24  $118.45 

23;z===B=c:aa  a==s==:;==33 


CHANGE  IN  FINANCIAL  POSITION 


below: 


A  sunsiary  of  the  funds  received  and  applied  during  1918  appears 


Funds  were  derived  from  the  following  sources- 
Sale   of  Capital  Stock  -  200  shares  at  par 
Income   from  Operations  including  provision 
for  accrued  depreciation- 
Final  Net  Profits 

Additions  to  Reserve  for  Depreciation 
Dividend  from  D.  B.   Story  Manufacturing 
Company 


Less-  Book  write-up  covering  profits  of 
D.  B^   Story  Manufacturing  Coopcmy 


Total  Funds  Provided 


$20,000.00 


$20,119.29 
14,623.49 

1,000.00 

$35,742.78 


1.792.96        33,949.82 
$53,949.62 


Copyright,   1919,  The  Ronald  Press  Company 


11-30-23 


.9- 

Which  were  applied   in  the  following  manner; 
Additional    investment    in  Buildings, 

Machinery  trnd  Equipment  $12,6  05.58 

Additional   Sinking  Fund  Deposit  10,* 000. 00 

Dividends  paid  lljsOO.OO 

Purchase   of  additional    stock  in  Improved 

Kitchen  Cabinet   Company  900.00 

Payment    of  1917   Income  Tax  in  excess  of 

provision  therefor  254,71 

Net   Increase   in  Working  Capital  as 

eiunmarized  below  18,689.53 

Total   (a8  above)  $53,949.82 


SUMMARY  OF  INCREASES   AND  DBCREASES   IN  WORKING   C/JITAL 

December  31 
Current  Assets  19   17         1   9  18  Increase       Decrease 


Cash                                                   I  11,733.55  $  14,633.83  $  2.900.28      $ 
Notes  and  Accounts 

Receivable   (net)                       18,127,34  13,753.16  -                4,374.18 

Liberty  Bonds                                          -  20,000.00  20,000.00 

Inventories   (net)                       102,775.34  124,653,86  21,878.52 

Prepaid  Expenses                             3,074,80  4,474.81  1,400.01 

Total   Current  Assets  $135,711.03  $177,515.66  $41,804.63     $ 

Less-  Current  Liabilities        80,851.48  103,966.56  23,115.10 


as  above  $  54,859.55     $  73,549.08     $18,689.53     $ 

It  will  be  noted  that   although  working  capital  has  actually  in- 
creased daring  the  year  $16,669,53,   the  ratio  of  current   assetB  to  current 
liabilities  has  remained  practically  constant    (1.68  to  1   in  1917  as  compared 
with  1.70  to  1   in  1918).     Our  examination  of  purchase  discounts  taken  and 
not  teken  leads  us  to  the  conclusion  that    if  thlc   ratio  were  2.5  or  3  to  1 
the  purchase  diecounte  for  the  year  could  have  been  more  than  doubled.     The 
problem  of  whether  or  not   an  additional    investment   of  $40,000,00  or 
$50,000.00   should  be  made   for  working  capital  purposes  should  bo  given 
careful   study. 


Copyright,   1919,   The  Ronald  Press  Company 


11-30-24 


-10- 


GENERAL 


During  the  course   of  our  audit  we  examined   in  detail   the   cash 
receipts  and  disbursements  for  the  months  of  April    and  December  1918;    tested 
the   distribution  as  shown  on  the    supporting  vouchers;    footed  the   cash  book 
and  traced  the  totals  into  the   general  ledger;    checked  over  the  sales 
invoices  during  the  same  two  months,    including  the  posting  to  customers* 
accounts;    and  by  these  and  other  checks  we   satisfied  ourselves  that  the 
books  had  been  properly  kept.     Vte  also  examined  the  minutes  of  the  Directors 
and  Stockholders  meetings  and  satisfied  ourselves  that   all    actiojv^aken  at 
these  meetings  affecting  the  accounts  has  been  properly  recorded  on  the 
books  of  the  company* 


In  conclusion  we  wish  to  acknowledge  the   courtesies  rendered  our 
representatives  during  the  audit. 

Very  truly  yours, 


Certified  Public  Accountants. 


Copyright,  1919,  The  Ronald  Press  Company 


p.        L.         BARNES        A.gD        COMPANY 

ADJUSTING   JOURNAL  ENTRIES 
TO  BRING  BOOKS    INTO   CONFORMITY  WITH  REPORT 


11-30-25 


Xxbilsit     V 


112 

OFFICE  FURNITURE  AND  FIXTURES  P/C  VOU.   #1561 
MISCELLANEOUS  RESTAURANT  EXPENSE  P/C"  VOU.    #1543 
FACTORY  K2AT,    LIGHT   AND  POWER  P/C   VOU.   #1580 
OFFICE  REPAIRS  P/C   VOU.    #1575 
ADVERTISING  -  NEWSPAPERS  P/C  VOU.    #1581 

To  ACCOUNTS  PAYABLE! 

November  and  December  1918  invoices  paid 
in  January  1919. 


78. SO 
17.50 
56.00 
6  4.13 
281.18 


I      497.61 


121 

CASH   IN  BANK 

To  PROFIT   AND  LOSS  1918 
1915   and  1916   Payroll   checks  written  off. 


26.78 


26.78 


131 
PROFIT  AND  LOSS  1918 

To  INVENTORY  RESERVE 
Markdovm   in  the  following  ac count e- 
Ac count  Cost  Market       Difference 


Lumber  (Yard) 
Lumber  (Factory) 
Lumber  (Kiln) 


111,584.29  110,758.28  f826.01 

1,023.96  1,001.19  27.77 

2,147;18  2,058.68  88.50 

$14,760.43  $13,818.15  $942.28 


942.28 


942.28 


■SMasssaaa 


IS3  =  333a3  3333: 


lii 


PR09IT  AND  LOSS   1918 

TO   IHVSNTORY  RBSSRVS 


Markdowns  in  Inventory  of  Work  in  Froceea 
to  glve.expreeaibn  to  additionca  cost  of 

Job  Ticket     Style         let.   Coat       Avg.   Coet     Markdown 

18,341  187  $6,287.12        $4,875.00     $412,13 

18,349  180  653.78  450.00        203.78 

■83333333      333333333    MSaaaaa 


615.90 


616.90 


Copyright,  1919,  The  Ronald  Press  Company 


11-30-26 


•2- 

la 

RETURNS  AND  AT.T.OWANCES 

BAD  vmfs 

9     264.00 
702,79 

To  ACCOUNTS  RECEIVABLB 

INSTAUiKNT  ACCOUNTS  RECEIVABLB 

$     773.00 
193.79 

Uncollectible  Accounts  Recalvable  as 
per  lists  thereof. 

HI 

PROFIT  AND  LOSS 

100.00 

To  INVESTMENT    IN  IMPROVED  KITCHEN 
CABINET   COMPAilY 

100.00 

10  shares   stock  purchased  July  1,    1918  at 
90j ;    Investment  was  charged  at  par  and  Profit 
and  Loss  credited;      this  entry  to   reduce   in- 
vestment to  cost. 

Ill 

BUILDINGS 

200.00 

To  OFFICERS'    SALARIES 

200.00 

To  adjust   salary  of  H.  E.  Barnes  for  the 
month  of  July  1918,    1/2  of  his  time  being 
devoted  to  the  construction  of  Building  0. 

(8) 

BUILDINGS 

1.264.67 

To  BUILDING  EQUIPMENT  AND  FIXTURES 

1,264.67 

Tranofer   of  cost   of  skylights   installed 
in  1918  to  Buildings  Account. 

(9) 

BUILDING  EQUIPMENT   AND  FIXTURES 

500.00 

To  REPAIRS  AND  UPKEEP  -  BUILDINGS 

500.00 

Cost   of  2  Johnson  heating  furnaces, 
charged  to  Repairs  in  error. 

.(10) 

PROFIT  AND  LOSS 

RESERVE  FOR  DEPRECIATION     -  MACHINERY 

•SAI£S 

70.00 

180.00 
350.00 

To  MACHINERY 

600.00 

Lathe   scrapped     during  year  and 
proceeds   credited  to   sales. 

Copyright,  1919,  The  Ronald  Press  Company 


11-30-27 


-3- 

(11 J 

INTEREST  PAID  $     212.07 

To  ACCRUED  IKT2REST  ON  NOTES  PAYABLE  ^     212.07 

Interest   on  Bank  Loans  and  Trade  Notes 
at  Decexalier  51,    1918. 

1121 

INTEREST  PAID  3,000.00 

To  INTEREST  ACCRUED  ON  BONDS  3.000.00 

Interest  Accrued  from  July  1,  1918  to 
December  '31,  1918. 

(13) 

ACCRUED  INTEREST  RECSIVABIfiA  224,24 

To   INTEREST  RECEIVED  224.24 

Interest  Accrued  as  follows: 

Notes  Receivable  $  35.61 

Liberty  Bonds  188.63 

csssxza 

• 

CI4) 

FEDERAL  INCOME  TAX  2,600.00 

To  FEDERAL  TAXES  ACCRUED  2,6l00.00 

Xstimatod  Income   and  Profits  Taxes 
for  1918. 


Copyright,  1919,  The  Ronald  Press  Company 


ur 


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